Four economic problems that China needs to carefully manage

Source:Global Times Published: 2019/2/14 18:48:40

Illustration: Luo Xuan/GT

There are four key problems facing the Chinese economy in 2019 in the areas of real estate, micro, small and medium-sized enterprises (MSMEs), financial markets and zombie enterprises. The country is probably at a quandary regarding addressing these four key problems.

First, real estate. The central government has obviously set the tone for the property market in 2019, with a view of stabilizing land prices, housing prices and buyers' expectations.

However, under the pressure of the global economic downturn, China's external demand is expected to weaken and consumption is unlikely to pick up. Thus, fixed-asset investment may become the key driver for China's economic development in 2019. Considering the current liquidity shortage and limited room for maneuver of local governments, it will be hard for manufacturing investment and infrastructure investment to see much growth momentum, which is why real estate investment has once again become the focus of attention in the market. According to a research report from China International Capital Corp, real estate investment in 2019 is expected to decline by 5 to 10 percent. Thus, several economists have called for an earlier policy adjustment to support the property market.

With the macroeconomy facing downward pressures and the property market showing signs of cooling, an appropriate policy adjustment in a timely manner is not just meant to stabilize investment and expectations in the short-term, it will also be conducive to narrowing the supply gap in China's property market and to effectively curb excessive rise in housing prices.

Second, MSMEs. China's private sector has been mired in a number of crises for some time, which is reflected not only in financing difficulties, but also in employment.

Since the second half of 2018, layoffs seemed to have happened across the private sector, with job cuts announced by some of China's biggest internet companies, securities companies and even real estate companies.

Private enterprises are of vital importance to stabilizing employment, and supporting the overall economy. Statistics show that private enterprises have become the most important sector for job creation, with the private sector adding about 90 percent of the new jobs in recent years.

For this reason, the central government and many provincial governments have rolled out intensive policy measures aimed at addressing the financing problems of private enterprises so as to promote employment and increase consumption. But we need to be vigilant against systemic financial risks behind a series of administrative measures.

Third, financial market. In China's financial market, which is dominated by retail investors, it is very important to effectively communicate policy intentions to the market and manage market expectations. Otherwise, the implementation effects of the policies may be adversely affected and probably even lead to some serious consequences.

There have been fluctuations in China's stock, foreign exchange and bond markets since 2018, contributing to pessimistic market sentiment. Looking ahead to 2019, the market environment, both home and abroad, will only get more complicated. Profound political and economic changes have happened to the world, accompanied by rising protectionism and pointing to increasing uncertainties. Domestically, cyclical and structural factors have increased the complexity of coping with various potential problems. The task of reform and development will become even more arduous, and it is imperative for China to issue more new and appropriate policies for the financial markets.

It can be expected that in the future, regulatory authorities will be more active in communicating with investors and financial institutions on hot issues and reform-related questions.

Fourth, zombie enterprises. Zombie enterprises, which must rely on government subsidies and renewed bank loans to survive, not only affect the optimized allocation of resources by occupying a great deal of social resources, but also cause serious overcapacity in some industries with the manufacturing of low-end goods products. They are not conducive to the research and development of new technology and products, reducing the utilization efficiency of social resources. Moreover, the disorderly competition of zombie enterprises will also bring irregularities to the market order, causing serious harm to high-quality enterprises.

Yet, the disposal of zombie enterprises faces challenges due to implementation and staff placement, which is related to people's livelihoods and social stability. Due to the ties between the local governments, enterprises and financial institutions, the process of clearing up zombie enterprises is likely to cause some collateral damage. Thus, it is critical as to how to "handle the issue appropriately" while speeding up the process at the same time.

The article was compiled based on a report from think tank China Finance 40 Forum.

Newspaper headline: Four economic problems need careful management


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