China is considering easing its plan on reducing debt in 2018, in an effort to ensure sustainable economic growth.
People familiar with the matter stated on Wednesday that rather than focusing on lowering leverage, they will just be keeping an eye on controlling the increase in borrowing.
By toning down its position on debt, Beijing could be indicating that it would instead stimulate progress with larger debt than perform acts of austerity.
It also means that this decision by the Communist Party’s top leaders is an official acknowledgement that the capital is having difficulty getting the economy out of debt-driven growth.
An official involved in policy talks said that it is not realistic to cut leverage when the entire economy relies on banks for funding.
For the world, the decision signals higher demand from China for oil and other commodities, but also constant concerns that the debt might spiral out of control and have a negative impact on global economy.
The move however, would oppose the Chinese government’s goal to lower the country’s growing debt, which President Xi Jinping made to act as a basis to his economic policy.
For the past two years, deleveraging has been a cornerstone of Xi’s platform. But while regulators restrained borrowing between banks, which allowed smaller lenders to boost risky borrowing, the country’s total debt pile keeps escalating faster than growth.
China’s top officials have long been pushing their policy priority to pull the economy away from high levels of debt, but it seems that it is not enough as it was reported that the debt load of Chinese firms has been soaring, with levels at the end of September rising the highest since 2013.
It was also speculated that that the country’s estimated total debt is now as much as triple the size of its economy.
Overall debt of China-listed companies is believed to have risen by 23 percent at the end of September, the fastest pace of growth in four years.
Still, the weakened priority might attest to be a concession by chief Communist Party heads that China’s economy might be more dependent on the rise in leverage than the government would prefer.
China may also be feeling the need to maintain economic growth, given the US’ upcoming passage of the most sweeping tax overhaul in more than three decades this week, which will reduce corporate tax rate and supposedly raise companies’ competitiveness to contend with them.
The tax reformation plan would lower corporate income tax rate from 35 percent to 21 percent, providing business owners a fresh 20 percent cut on business income.
Indeed Xi, along with the Communist Party has been attempting to pin down borrowing between banks, but ever since the crackdown, smaller banks have ramped up risky borrowing.
The economic plan is set to be released later in the day and is expected to present steps to keep property bubbles at bay, such as raising land supplies, creating home rentals, and developing an agenda for property taxes.