As the second largest economy in the world deals with high debt risks, a government economist calmed the market after releasing a statement that everything is under control.
A well known government economist told the media that the possibility of having a debt crisis in China is small. At present, China has a total debt of 168.5 trillion yuan in 2015, covering around 249 percent of the GDP while its savings rate stands near 50 percent.
Li Yang, a top government think-tank in China, went optimistic over his statement as he relayed to the news conference that China is a country with a high savings rate and its debt problem is mostly internal, which is totally different from countries with low savings.
Based on the calculations of Mr. Yang, China has net sovereign assets of 103.3 trillion yuan with 131 percent of debt-to-GDP ratio at the corporate sector in 2015. Further, the debt-to-GDP ratio can surge to 156 percent with the inclusion of the local government financing vehicles liabilities.
Mr. Yang added that if there are problems in corporate debt, banks will have problems immediately. If banks have problems, government finances will have problems as banks are owned by the state.
Meanwhile, most of the policy makers were cautious of the risks circulating as the authorities pushed stimulus which could drive growth to the economy. Mr. Yang recommended that the government must call for a unified task force who can manage the debt concerns and has to intervene in giving permisiion to firms to turn debt into equity.
IMF advised China on Debt Risks
In other news, the International Monetary Fund warned China regarding the hike of debt risks. The international organization suggested that the government must pay attention to control the credit growth.
Although the government economist declared that the risks are still under control, the IMF indicated on its report that corporate debt, though still manageable, is high and rising fast. Addressing the corporate debt problem is imperative to avoid serious problems down the road.
IMF deputy managing director David Lipton, who delivered the assessment of the organization towards on the economy of China, explained that a comprehensive plan and concrete actions are needed to harden budget constraints, especially on, restructure or liquidate weak firms, recognise and allocate losses, address the associated social costs, and facilitate market entry.
Moreover, the IMF recommended to switch from industry to services, given the recent figures of the GDP. On the other hand, the organization lauded the effort made at the exchange rate. The IMF reported that the renminbi exchange rate is becoming more flexible and market-based, following changes introduced since last year.
MSCI on China's A-Shares
Elsewhere, the MSCI delayed the inclusion of the China’s A-Shares on its benchmark as the international institutional investors wanted to see more improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index.
Critics raised that it was a big joke to let China’s A-Shares be included on the MSCI Index since it has a long way to go and China only wanted the benefits it could get, putting aside the regulations involved. However, an intermediary of Beijing options responded that it was not necessary to be irritable on the outcome and just in a matter of time it will be included.
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