context: In this year's Central Economic Work Conference (CEWC), deleveraging—domestic economists' latest favourite buzzword—received no specific mention. This was due, analysts suspect, to fears for unintended consequences of hardline deleveraging measures. However, if high-quality growth is to supplant fast growth in Xi's new era, moving away from a debt-fuelled investment-heavy model is the biggest challenge.
Despite lack of mention in the Central Economic Work Conference (CEWC), deleveraging will remain atop policymakers' economic agenda in 2018, argues Deng Haiqing 邓海清 JZ Securities global chief economist, as controlling the risk of debt crisis is still key to containing and defusing risks.
While regulators have reined in the problem within the financial sector since Q4 2016, warns Deng, macro leverage (measured by the economy's total debt over nominal GDP) remains alarmingly high. The most acute problems are, he states, implicit local government debts, soft budget constraint problems of 'zombie firms', and quick build-up of household debts.
Despite a series of regulatory measures, including crack-downs on local government financing vehicles (LGFVs), debt swaps, and the use of PPP, local governments have continued to increase their borrowings, but in more disguised ways. 2018 may be a watershed year for this issue, speculates Deng, as scrapping the 'GDP first' doctrine strikes at the root of local government borrowing. One potential side effect may be a growth crunch in infrastructure investments, which are traditionally heavily debt-financed.