This year, China’s economic progress is expected to slow 6.5 percent and cool further to 6.3 percent in 2018, the Organisation for Economic Co-operation and Development (OECD) stated, though exports are set to pick up as global demand make stronger.
The Organisation for Economic Co-operation and Development (OECD) also advised of China’s blowup corporate debt in its bi-annual economic outlook report released on Tuesday.
“In terms of risk, we believe that internally the biggest risk is the accumulated and fast pace of growth of credit both in terms of shadow banking and the banking system,” Alvaro Santos Pereira, director of the country studies branch of the OECD’s Economics Department, told reporters.
“I think it’s important to intensify efforts to tackle this issue.”
China’s corporate debt is approximately 175% of GDP, one of the highest in emerging market economies, he stated, with state-owned enterprises (SOEs) accounting for around 75 percent of that.
“One of our top recommendations is to remove implicit guarantees to SOEs and other government and public entities,” said Margit Molnar, head of the China desk at the OECD’s Economics Department.
Such assurances have enabled SOEs and local government investment vehicles to continue accumulating debt.
The financial dangers in China are increasing because of indebted enterprises, increasing non-bank activities and enormous over capacity, according to the reports.
The OECD’s forecast for 2017 is in line with the Chinese government’s growth target of approximately 6.5% this year, against last year’s 6.5-7 percent range. The economy raised 6.7 percent in 2016, the sluggish pace in 26 years.
Several analysts believe the more modest objective will give policymakers additional room to tackle debt risks and introduce painful reforms, though authorities are expected to proceed carefully to avoid hurting growth.
Economic progress stays high “but is gradually and appropriately moderating as the population ages and the economy rebalances from investment to consumption,” according to the report.
This year, export volumes are expected to increase 3.4 percent and 3.3 percent in the coming year, increased from 2.3% in 2016, due to surges global demand.
Import volumes are set to grow 7.7% this year and 6.0% in the year 2018, declined from 8.6% progress in 2016, as imports used to process exports decline.
The world’s second biggest economy needs more innovation, entrepreneurship, effective corporate governance and reform of its state-owned sector, the Organisation for Economic Co-operation and Development (OECD) added.
But the report did not single out the risk of rising protectionism from the United States, but noted that protectionism by some trading partners would harm Chinese exports.
However, it stated China could mitigate this by signing free trade agreements with other partners.
“Rising protectionism to the level that some people are talking about – or reversing some of the gains of the last ten, fifteen years – is going to be extremely costly to everyone,” Pereira said.
China’s fast economic growth has been accompanied by increasing inequality which could be battled by reforming the tax system and the household registration system which limits labor movement, the OECD stated.
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