China’s financial reforms are unlikely to be a priority in President Xi Jinping’s second five-year term, says London-based TS Lombard.
The research firm noted in its latest China Watch report that despite the Chinese central bank governor, Zhou Xiaochuan’s call for a more market-oriented economy, China’s top leadership has learnt the lessons from poor execution of financial reforms back in 2015, which resulted in the country’s equity bubble burst.
Chief emerging markets (EM) economist Lawrence Brainard said, ‘This has convinced China’s top leadership that more, not fewer, controls are needed at present.’
Evidence for this conclusion can be found in the relative stability in economic policy over the past 18 months. Such results reflect the strict enforcement of controls on capital outflows and much greater top-down coordination of decision-making.
Meanwhile, a poll by JP Morgan found that nearly 70% of the participants thought the biggest risk facing emerging markets in the coming year is a significant slowdown in China. While a majority expected 6 – 7% GDP growth next year, nearly 45% thought growth would drop into the 4-6% range.
Another issue about China is the country’s increasing debt. According to Jin Zhongxia, International Monetary Fund’s executive director for China, the country aggregate debt-to-GDP ratio is 260%, which is higher compared to other EMs. This is comparable to that of the US and the euro zone, and is below Japan’s, which is well over 300%.
‘This begs the question whether reforms of China’s capital markets are likely in the near term,’ Brainard said.