Steady Path Ahead

　　Today， as China faces risk through upgradingthe structure of its economy， the general consensusis that these risks are in the main manageable. Morespecifically， China’s current debt level is under control andwithdrawal of the quantitative easing monetary policy，or QE， by developed nations， is not likely to trigger afinancial crisis in the country. Looking further， challengesof overcapacity are being resolved and the possibility ofeconomic turbulence brought about by the real estatemarket bubble is slight.

　　China’s debt level

　　China’s debts include government debt， corporate debtand household debt. The overall debt level is 220 percentof the nation’s gross domestic product (GDP). Statistics byChina’s National Audit Office show government debt atall levels had reached 30 trillion yuan ($4.8 trillion) by theend of June 2013. This figure was 60 percent of GDP， lowerthan the world average of 80 percent of a nation’s GDP. Indeveloped countries， government debt is usually 100 to110 percent of GDP.

　　In the same time-frame， China’s household debtamounted to 16 trillion yuan ($2.6 trillion)， 31 percentof GDP， much lower than the world average. Householddebt in developed countries can reach 80 to 100 percentof GDP. Chinese enterprises suffer heavier debt burdens，about 120 to 130 percent of GDP， while the average is lessthan 100 percent of GDP in developed nations. However，China’s overall debt level is lower than the United Statesand the Euro zone， both exceeding 300 percent of theirrespective GDP. Japan’s overall debt level totaled 500percent of the GDP. Comparatively speaking， China has ahigh savings rate to boost economic growth. In addition，a low budget deficit， a trade surplus， abundantforeign exchange reserves and relativelylow inflation， all play to China’s advantage forfuture development.

　　Even if there are potential risks in regardto debts， China is capable of coping. Byabsorbing private investments and raisingfunds through the stock market to increaseenterprises’ capital， high corporate debtlevels will be alleviated. Creditors can alsoswap their debt for equity， or debtors cansecuritize their credit assets， so that the riskof the enterprises’ debt can be lowered.

　　The National Audit Office estimates thatChina’s local government debt amountedto 20 trillion yuan ($3.2 trillion) by the end of June 2013.Although this seems a large sum， the funds are mostlyinvested in constructing urban facilities and infrastructure，which will benefit the local economy in the long run.

　　In addition， large sums are usually borrowed for specificprojects， which are generally profitable. Local governmentscan also liquidate part of their assets to pay off thedebts.

　　For debts without specific projects， local governmentshave the capacity to repay them through taxation andtolling. They can also issue long-term bonds to pay backshort-term bonds that expire. Finally， by introducing themechanism of public-private partnerships and establishingfinancing and developing banks， local governmentscan enhance their paying abilities for infrastructure debts.Therefore， the possibility of an overall debt crisis is slight.

　　Withdrawal of QE

　　There are worries that the withdrawal of the U.S. QEmonetary policy may cause economic turbulence toChina. Unlike other emerging economies whose currentaccounts are in deficit， while capital accounts are insurplus， China has a low inflation as well as low level offoreign debts. For the emerging economies， both the currentaccounts and the capital accounts would be in deficitif the QE was cut， resulting in a sharp decrease in thenations’ foreign exchange reserve and spurring a currencycrisis in turn.

　　However， the withdrawal of QE will not trouble China，but means an opportunity to enhance the country’smicroeconomic regulation. In the past few years， as bothChina’s current and capital accounts were in surplus，excessive exchange rate appreciation posed a threat toChina’s economy. Against the backdrop of excessliquidity in the domestic market， it is necessaryfor the central bank to hedge the risks，which will also inevitably bring unwanted sideeffects. If China positively addresses cuttingthe QE， the current account surplus will be balancedby the capital account deficit， realizinga balance of international payments. Besides，as international hot money leaves China， itis possible for the central bank to ride thewave and cut the reserve requirement ratio toreduce the opportunity for regulatory arbitrage.It will also eliminate the threat brought by excessiveyuan appreciation and stimulate exports atthe same time.

　　Overcapacity

　　Indeed， China is suffering from overcapacity in someindustries. But there are now signs that the problem canbe alleviated through industrial restructuring. Loans toindustries with overcapacity have been on the declineand loans to emerging industries are on the rise. As thedeveloped economies are beginning to pick up， the productivityof some industries that were previously plaguedby overcapacity will recover， such as the shipbuilding industry.

　　Strong demand for investment in emerging greenenergy industries， such as new-energy vehicle manufacturing，will see the excess production finding a way to beconsumed. Besides， China’s production capacity at thehigh end of the value chain is still seriously insufficientand the density of its railway and highway networks islower than that in developed nations， leaving much roomfor more investment.

　　China’s urbanization is facing a series of challenges，including poor drainage facilities， inconvenient transportationfrom residential areas to business districts andinsufficient utilization of underground space. In futureurbanization， China is planning to build better social facilitiesto improve care for senior citizens. All of these factorsprovide opportunities for industries with overcapacity.

　　Real estate

　　High housing prices in cities like Beijing and Shanghaiare actually not creating a housing bubble. The limitedland available in big cities cannot satisfy the demandfor rapid urbanization. The weak housing price in thethird- and fourth-tier cities doesn’t mean the real estatebubble is bursting and cold data alone cannot provideconclusions for the state of China’s real estate market. Forinstance， when every household possesses more thanone property on average， China’s real estate market willbe saturated. This argument actually does not measureup to the facts. As China has a large floating population，it is normal for people to have more than two properties- one in their hometown and one in the city where theywork. If they rent an apartment in city， it means that someurban households need to have more than one property.

　　Financial risk in the property market is also not a worry， asthe down payment sum of the mortgage is usually largeand the mortgage loans are usually of high-quality capitalfor banks.