Experts expect China to hit growth targets

China is on track to achieve its economic growth target of 6.5 per cent this year - and its growth targets for the next few years.

But it faces uncertainty over sustaining longer-term growth unless it solves some structural issues.

That was the consensus view among various China experts at the annual FutureChina Global Forum yesterday. They were largely optimistic over the country's ability to continue expanding its economy despite fears related to its ballooning corporate debt and structural issues.

Mr Tommy Xie, head of Greater China research at OCBC Bank, said one significant event this year was when credit rating agency Moody's downgraded China's credit rating in May - the first time in 28 years, citing China's high corporate debt.

Many China watchers worry about its rapid credit expansion - an estimated level of 166 per cent of economic output last year, he said.

"But if we look at 2013, it was already at 130 per cent. How did China survive 2013 with that debt level? To me, it is because of the unique debt structure. Over 55 per cent of corporate debt comes from state-owned enterprises.

"Even at 166 per cent, you still have a lot of room for the government to manoeuvre," he said, citing debt-for-equity swaps - where a firm's debt is exchanged for equity.

He estimated that so far this year, China firms have already done close to US$100 million (S$138 million) in such debt-for-equity deals.

Mr Xie said he was "slightly optimistic", adding that the debt issue was "something we need to worry about, but it won't be a key trigger point for a debt crisis in China".

Mr Chris Leung, executive director and senior economist at DBS Hong Kong, said he was "neither an optimist nor a pessimist". He said China will not have issues hitting growth targets of between 6.5 per cent and 7 per cent. But it is trapped in what is called the impossible trinity - that governments cannot pursue more than two of three objectives: Independent monetary policy, a fixed exchange rate and free capital flows.

"China wants to achieve all three, and the only way you can do that is to keep walking within the triangle... but the economy cannot break through a certain point until it resolves this issue," he said. "Walking circles within the triangle" sacrifices productivity, he noted, adding that disposable income per capita is growing, but much more slowly.

Professor Yukon Huang, senior fellow of the Asia Programme at the Carnegie Endowment for International Peace, said he was an optimist, in spite of China's weak institutions and policy distortions.

Amid slowing growth and dipping company rates of return, some of his optimism was based on shifting locations of economic activity.

Productivity has shifted into China's inland provinces since 2010. He expects China's central provinces to play a growing role in driving growth and productivity.

This has big implications for firms keen to invest in China, and is being driven by the high-speed train network and the Belt and Road initiative (Obor), he added.

In a separate panel on Obor, Mr Teo Eng Cheong, chief executive international of Surbana Jurong, said the initiative was a rare opportunity for firms with capabilities in infrastructure and urbanisation.

Panellists noted the importance of having local partners. For instance, state-owned enterprises are better connected with better resources, while private enterprises are more entrepreneurial.

A version of this article appeared in the print edition of The Straits Times on July 14, 2017, with the headline 'Experts expect China to hit growth targets'. Print Edition | Subscribe