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Messages of Confidence
 NO. 11 MARCH 17, 2016

Editor's Note: Fears and rumors that China's slowing growth would drag down the global economy have surfaced since last year. Right before the opening of this year's full sessions of China's national legislature and top political advisory body, Moody's Investors Service downgraded its outlook for China's government credit ratings from "stable" to "negative" on March 2, citing reasons including rising government debt and a continuing fall in reserves. 

In response, top officials in charge of economic affairs met the press, aiming to reassure the world by saying that China would continue to contribute to global growth. Edited excerpts of their comments follow: 

'Hard landing' impossible 

"The so-called predictions which have called for China's hard landing will definitely come to nothing." 

—Xu Shaoshi, Minister of the National Development and Reform Commission 

It is undeniable that the Chinese economy has inner resilience and a strong ability to resist risks.

With a solid foundation, an enormous market, vast room for regional development, improved quality of production factors, and rich experiences in macro-control, China is more than capable of keeping economic growth at rates within a reasonable range.

It's absolutely impossible that the Chinese economy will go through a sharp slowdown—otherwise known as a "hard landing." The so-called predictions which have called for China's hard landing will definitely come to nothing, since the possibility of incurring it does not exist.

In addition, reports that "the Chinese economy is dragging down the global economy" are illusory, too. China's economic growth still ranks among the top of the world's major economies. Last year, its GDP grew at 6.9 percent, which was a hard-won result amidst a worldwide economic downturn. Despite a decrease in import value caused by a price slump in commodities, China's import volume keeps on rising—forming an important contribution to the world economy. Another significant addition is its growing outbound direct investment, which totaled $118 billion last year, up 14.7 percent year on year.

China is still a major engine for the world's economic growth. According to the International Monetary Fund (IMF), it made up 15 percent of the global economy in 2015. Its rate of contribution to global economic growth may have also exceeded 25 percent. China's addition to the global economy is obvious.

Furthermore, there were rumors that China's stock and foreign exchange markets' turbulence in January contributed to the chaos seen in the American and European markets.

Actually, China's influence on the global financial markets' recent turmoil has been over-hyped. China is unable to produce such a powerful spillover effect. From February 8 through 12, big drops were witnessed in the American and European stock markets, as well as in bulk commodities such as crude oil. But at that time, China's financial markets were closed during the Chinese Lunar New Year holiday.

Debt risks controllable 

"As long as the local government debt risks are controlled, they will bring no big harm to the overall economy." 

—Lou Jiwei, Minister of Finance 

China's fiscal revenue is in a severe situation—it needs to expand the fiscal deficit. It has some room to do so, but cannot expand too much. Fiscal revenue accounts for around 30 percent of China's GDP, lower than that of other countries and much lower than that of developed economies. It could therefore moderately increase its fiscal-deficit-to-GDP ratio.

China's government-debt-to-GDP ratio—around 40 percent—is also lower than other countries. It still has room to increase. What's more important is to make good use of the room, to support the supply-side structural reform and inject vitality into the economy.

To control the risks of local government debt, the Ministry of Finance (MOF) is going to work with local fiscal authorities to strengthen management. A total of 5 trillion yuan ($767 billion) of local government debt is due to come this year. MOF will continue allowing local governments to issue new bonds to replace those coming due. But as for contingent debt, local governments would pay more amid an economic growth slowdown. MOF should control the ratio of contingent debt paid by local governments.

MOF should also prevent all kinds of disguised bond issuance. It's closely watching public-private partnership (PPP) projects, because it has found that some local governments are borrowing money through PPP projects. As long as the local government debt risks are controlled, they will bring no big harm to the overall economy.

Ample foreign reserves 

"As China's economic growth shifts gears, the decline in foreign exchange reserves is something that the Chinese Government has anticipated."

—Yi Gang, Vice Governor of the People's Bank of China

China's foreign exchange reserves, currently totaling $3.2 trillion, are still the largest in the world, more than doubling that of Japan, the second largest. The fast accumulation of foreign exchange reserves happened in the past decade. The amount of reserves soared from a mere $300 billion in 2002 to a peak of $3.99 trillion in June 2014. As China's economic growth shifts gears, the decline in foreign exchange reserves is something that the Chinese Government has anticipated.

China saw its foreign exchange reserves drop by about $500 billion in 2015. The reserves mainly flowed into the purses of Chinese citizens and companies.

Last year, deposits of U.S. dollars within China increased by tens of billions, following an increase of $100 billion in 2014. Banks increased their stacks of greenbacks by around $100 billion, and corporate debt denominated in U.S. dollars dropped by around $100 billion.

Meanwhile, corporate and individual outbound payments in foreign currencies, which included tourism, education and consumption expenditures, surpassed inbound payments by $240 billion last year.

The appreciation of the U.S. dollar against other currencies last year was also a reason for the decrease in foreign reserves, because non-dollar reserves lose value when being converted to dollars.

Admittedly, there are capital outflows mixed with the above mentioned reductions. However, the majority of foreign exchange reserve losses can be explained by the gains made by China's citizens and companies.

In addition, China follows the standards set by the IMF when calculating foreign reserves, and assets that lack liquidity were not included.

Copyedited by Bryan Michael Galvan

Comments to yushujun@bjreview.com

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