Lin Min

linmin67@hotmail.com

RESEARCHERS at the central bank and the Ministry of Finance last week engaged in a rare war of words, blaming each other for insufficiently macro-managing the economy.

Xu Zhong, head of the Research Bureau under the People’s Bank of China, fired the first shot, saying in a published article that any proactive fiscal policy falling short of incurring increased budget deficits is just a sham. The Central Government has for years categorized its fiscal policy as “proactive” as a way to prop up economic growth.

As a response, the Ministry of Finance published a few articles on its website defending the ministry’s policies, with one of the articles even accusing the central bank of making decisions “from the perspectives of a small country.”

The spat caught wide attention not only because such open arguments between two government departments are rare, but also because it came at a time when China is tackling mountains of debts in a painful deleveraging campaign amid an economic slowdown and a sizzling trade war with the United States. Their arguments highlighted the fact that economic decision-makers are now having trouble keeping healthy economic growth while trying to lower debt levels, which have risen to alarming levels.

Amid the deleveraging efforts, which started last year and are scheduled to last for three years, financial risks have popped up one after another in recent months.

Zhou Jiancan, chairman of Zhejiang Jindun Holding Group, jumped to his death from a building in January, leaving behind 9.89 billion yuan (US$1.46 billion) in debts. His death shed light on a cash crunch that has besieged many medium and small businesses.

In May, DunAn Group, another Zhejiang firm that controls two listed companies, appealed for government support because it was having “liquidity difficulties” as it tried to deal with 45 billion yuan worth of debt.

The cash crunch also fueled a sell-down in the stock markets in recent months. Jittery investors dumped stocks that were showing signs of financial stress. The shock reverberates. More than 100 online lending platforms known as P2P websites have closed since early June, leaving millions of savers in cold water as managers of some of the platforms disappeared while others were placed under police investigation.

These defaults and shutdowns don’t necessarily mean systematic risks are imminent. However, confidence of investors and businesses seem to have taken a hit, as evidenced by the yuan’s plunging exchange rates against the U.S. dollar and the tumbling stock markets.

China doomsayers have also become active again these days. American author Gordon Chang, who notoriously predicted an inevitable meltdown of the Chinese economy in his 2001 book titled “The Coming Collapse of China” only to witness the country’s economy to keep growing year after year, has been out with a new article saying China, troubled by a trade war and excessive debts, is “poised to bring down the global economy.”

Scary their predictions may seem, doomsayers like Chang have failed to see the potential of China and the country’s abilities to weather storms. Although facing a policy dilemma, China has plenty of policy instruments at its disposal.

Unlike Western countries that are mostly constrained by limited fiscal resources, China has witnessed rapid increases in fiscal revenues, which make massive tax cuts and more public spending possible. The country’s tax revenue surged 14.4 percent in the first half of this year from a year ago, much higher than the 6.8 percent GDP growth, according to the Ministry of Finance.

Policy fine-tuning is also under way. On Friday, the banking regulator published draft rules on wealth management services of banks, which are less stringent than expected. On the same day, the central bank and stock market regulator published asset management rules that are looser than expected, adding to evidence the regulators are giving a reprieve in the deleveraging campaign.

Given that government, corporate and household debts remain at high levels after years of credit binge, policymakers will not flood the market with liquidity again, but will resort to fine-tuning. Regulators will need to keep a perfect balance while walking on a tightrope in their efforts to cut debt levels while preventing a hard landing of the economy.

(The author is head of the Shenzhen Daily News Desk.)