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Financial Risk Management (FRM File 005)- China Investment Risks

Financial Risk Management (FRM File 005)

- China Economic Development and Investment Risks










China Economic Development and Investment Risks




CHINA Economic growth is being supported by stimulus, but is set to edge down further to 6.1% by 2018. At the same time, risks are rising. The economy is undergoing transitions on several fronts. Private investment will be reinvigorated by the removal of entry restrictions in some service industries, but held back by adjustment in several heavy industries. Housing prices are again rising fast in the bigger cities, but working off housing inventories in smaller cities will take time. Consumption growth is set to hold up, especially as incomes rise and urbanisation continues. Reductions in excess capacity will ease downward pressure on producer prices but consumer price inflation will remain low. Import demand for goods will be damped by on-shoring, while services imports, in particular tourism, will grow rapidly. Exports will be held back by weak global demand and loss of competitiveness. Fiscal policy, including via the policy banks, is very expansionary.


Monetary policy prudence is called for so as not to aggravate imbalances. Removing implicit public guarantees and ending bailouts would make for better and more market-based pricing of risk. Corporate debt has risen substantially to high levels and the enterprise sector therefore needs to deleverage.


Supply-side reforms to cut excess capacity need to accelerate and bankruptcy of zombie firms be made easier. Leveraged investment in asset markets should be contained and monitored. Public investment should focus on efficiency and avoid crowding out the private sector. New revenue sources, such as property taxation or a more progressive personal income tax, can be used to meet increasing spending needs for public services and social security.


Fiscal relations across government levels should be revamped so that local mandates are adequately funded.












Risks are mounting apparently nowadays


Policy stimulus will help keep growth above 6% over 2016-18. However, investment is increasingly financed by public funds. Opening up additional sectors to private investment will provide new opportunities for private capital. Current growth rates of disposable income will support consumption growth, but without structural reforms to reduce precautionary savings such as the provision of a better social safety net and higher-quality public services, rebalancing will advance only slowly.


The slow pace of reform of state-owned enterprises and high leverage will continue to take up resources, preventing reallocation for more efficient use. Soaring property prices in first-tier cities and leveraged investment in asset markets magnify the risk of disorderly defaults.

Excessive leverage and mounting debt in the corporate sector compound financial stability problems. Rapid adjustment in the real estate and industrial sectors would drag down growth temporarily, but is necessary to strengthen resilience. Supply-side policies, including deleveraging and working off excess capacity, are crucial to avoid a sharp slowdown down the road. Greater-than-expected stimulus, in contrast, would result in stronger growth in the short term but larger imbalances later. On the upside, a stronger-than-foreseen global rebound would support Chinese exports and growth.




Written by Dr. Chao Yuang Shiang
Faculty, Dep. of Finance, Nan Hua university


趙永祥 博士
(南華大學財務金融學系暨財務管理研究所 專任助理教授)


19-August-2017

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趙永祥  博士 (Dr. Chao Yuang Shiang)




                                   









The author has published four international-finance related books which are shown as follows from 2012 to 2017.




                 
凡事唯有投入,結果才能深入; 凡事唯有付出,結果才能傑出;
凡事唯有磨鍊,結果才能熟練; 凡事唯有不煩,結果才能不凡。
能與智者同行,你會不同凡響; 能與高人為伍,你能登上巔峰。
你雖不能改變環境,但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang (PH.D in management), Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
website:amazon.com/author/drchao
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