Business / Economy

Questions most asked about China's economy

( Updated: 2015-05-27 16:18

China's economic slowdown has been worrying markets but former Federal Reserve Chairman Ben Bernanke said there was no risk of a hard landing and the economic slowdown is necessary as it needs to change its growth model to be more sustainable in the long term. Here we answer some of the questions most asked about China's economy, based on a UBS research report.

Where are we in the property downturn?

We are still in the middle with new property starts expected to decline by another 10-15 percent this year as its cumulative impact on total construction increases in 2016. Property policy easing helps mitigate but will not reverse the downturn.

What is happening with China's monetary easing?

China has delivered multiple reserve requirement ratio (RRR) and benchmark rate cuts to mitigate passive tightening. We expect at least one more rate cut and 100 bps RRR cut, as well as larger scale pledged supplementary lending to help stabilize growth and contain financial risks.

How will the local government debt swap work and play out for banks?

Local fiscal reform seeks to address both the stock and flow of debt. Some 15 trillion yuan in local level debt will be formally recognized as local government debt and some swapped into provincial bonds, directly with current creditors. Swaps can lower local governments' debt servicing burden, and reduce banks' capital charge and loan-deposit ratio albeit while also reducing their interest income.

Does easing compromise structural reforms?

We don't think cyclical easing will necessarily hinder structural reforms which have progressed visibly in the past year. We are not as excited as the market about near-term State-owned Enterprise reforms.

Does China need more infrastructure and how will it be financed?

We think China still needs more infrastructure, especially in public transport, water and environmental protection. Financing will come from multiple channels, including Public-Private Partnerships (PPPs), policy banks, and old local government financing vehicles (LGFVs).

Is China's anti-corruption drive a short-term fix and bad for growth?

No. We think the long-term mechanism is being put in place by ongoing budgetary and price reforms, cuts in necessary government approvals and legal system reforms. Less corruption will reduce waste and business transaction costs, improving resource allocation and social stability.

What is happening to re-balancing?

China's re-balancing has already started, driven by both the investment slowdown and fundamental structural reforms. Consumption has contributed more to growth than investment since 2010 and remains resilient.

When will China start cleaning up its banks and how?

The clean-up has started with faster non-performing loan write-offs and local debt restructuring. The low official NPL ratio makes a large government recap highly unlikely. We expect banks to raise capital soon, via channels including equity.

Why no financial crisis?

China's high domestic savings and the existence of capital controls provide banks with ample liquidity. Extensive government ownership and controls also mean China can manage the pace of deleveraging instead of having it directed or enforced purely by market forces.

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