Proper policies key to easing stresses on China's economy

Source:Global Times Published: 2018/10/24 21:58:40

Proper policies key to easing stresses on economy

Illustration: Luo Xuan/GT

Against the background of the dispute with the US, the impact of trade on the Chinese economy has become a hot topic.

In 2016, the contribution of net export to China's economic growth was actually negative, because the global economy hadn't recovered on the whole. In 2017, as most global economies recovered, trade made a positive contribution.

Given the downward pressure faced by the economy, the Political Bureau of the Central Committee of the Communist Party of China recently called for six stabilities: employment, finance, foreign trade, foreign investment, investment and expectations. It is not an easy task to achieve stability on so many fronts, and it takes time and great effort.

Stabilizing expectations is key to stabilizing the economic situation, and stabilizing expectations requires reform. It is imperative to make policies more reasonable so they will support supply-side structural reform.

Take the stock market as an example. With equities on the Chinese mainland declining, Liu Shiyu, chairman of the China Securities Regulatory Commission, said the spring of the Chinese stock market is just around the corner. The capital market is generally considered as the barometer of the Chinese economy, so market movements to a certain extent reflect changes in expectations for economic development.

It is because of concerns over the nation's economic performance that the stock market has been bearish for quite a long time, leading to a sharp drop in valuations. Because of those low valuations, spring is not far away for the market. In the past, the overall valuation of the A-share market was quite high, with the median price-to-earnings (P/E) ratio peaking at 70 times in 2015.

Now after a long period of adjustment, the median P/E ratio is 23 times, roughly equivalent to many Western stock markets. In this context, spring is indeed not far away.

Supply-side structural reform has led to deleveraging in some industries. This may raise another key question - will some companies be able to survive the winter before the spring comes? Unlike 2015, there's no risk of gray market financing, but this time pledged shares pose a more serious risk than before. Some listed companies have pledged their shares as collateral for loans.

When stock prices fall to certain critical levels, those pledged stocks will be liquidated unless the companies add collateral or repay the loans. As the stock market continues to fall, shares with prices approaching such warning levels face an increasing risk of forced liquidation, which puts further pressure on the shares' prices.

The government in Shenzhen, South China's Guangdong Province, is reportedly prepared to inject billions of yuan into Shenzhen-based listed companies that are under liquidation pressure. Such a move is essential, and other local governments should consider similar measures to help local companies to get through the "winter."

Another important aspect in stabilizing expectations is policy coordination. The authorities have announced various policies aimed at promoting supply-side structural reform. Each of these measures makes sense by itself, but the combined effect of these policies may be harmful to some companies.

Tougher requirements for environmental protection, demolition of illegal buildings, industrial standards and other issues are all very necessary for overall reform, but companies may not be able to handle all these requirements at the same time.

In this sense, policies must be carefully coordinated, which will be beneficial in their implementation and in stabilizing expectations.

The article was compiled based on a speech made by Li Xunlei, chief economist with Zhongtai Securities, at the Hangzhou Bay Forum on October 17.
Newspaper headline: Proper policies key to easing stresses on economy


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