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How China can manage its global risks

By Andrew Sheng and Xiao Geng | China Daily | Updated: 2018-06-01 09:16

The world economy and international system are now characterized not only by deep interconnectedness, but also by intensifying geopolitical rivalries. For China, the situation has been complicated further by US President Donald Trump's evident view of the country as a strategic competitor, rather than a strategic partner, not to mention massive domestic social change and rapid technological disruption. The only way to mitigate the risks that China faces is with a tough, continuous and comprehensive reform strategy.

A key risk is financial. At least four "mismatches" lay at the root of past global financial crises, and three of them plague China today. First, with its bank-dominated financial system, China (along with Europe and many emerging economies) suffers from a maturity mismatch, owing to short-term borrowing and long-term lending. Yet, unlike many emerging economies, China does not struggle with a currency mismatch thanks to its large foreign exchange reserves and persistent current-account surpluses, which make it a net lender to the rest of the world.

But China has not avoided the third mismatch, between debt and equity: The credit-to-GDP ratio doubled over the last decade highlighting China's underdeveloped long-term capital and equity markets. Nor can policymakers afford to ignore the fourth mismatch - between ultra-low nominal interest rates and the relatively higher risk-adjusted return on equity (ROE) for investors - which has contributed to speculative investment and widening wealth and income inequality.

How China can manage its global risks

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