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China economy improving, capital outflows are cooling

Via Times of Malta : China’s economy is showing signs of improvement while capital outflows from the country are moderating, top Chinese officials said, seeking to shore up fragile investor confidence after recent market volatility.

Chinese leaders have repeatedly tried to reassure jittery financial markets and China’s major trading partners that Beijing is able to manage the slowing economy, following a slide in the country’s stock market and depreciation of the yuan.

Recent data, until early March showed that the economy was improving, vice premier Zhang Gaoli told an economic forum.

“We don’t want to shy away from saying that China’s economy is facing downward pressure, but overall the progress is steady,” he said.

Commerce Minister Gao Hucheng told the forum China’s foreign trade was likely to show a big rebound in March after falling in the first two months of the year.

China’s manufacturing output in January and February grew at its weakest pace since 2008, according to data released by the National Bureau of Statistics earlier this month.

Speaking at the same forum, central bank governor Zhou Xiaochuan said that capital outflows out of China showed a significant easing, citing an abating of concerns about a slowdown in the world’s second-largest economy.

Still, Zhou expressed concern about the high level of corporate debt relative to gross domestic product even as he noted the relative cushion offered by China’s higher savings rate, which was just over 46 per cent of GDP last year.

“The overall leverage rate of China’s economy is on the high side, which is the overall debt to GDP ratio we have often talked about, especially the ratio of corporate lending to GDP is on the high side,” said Zhou.

Zhou said the “relatively high” leverage ratio could cause some risks and therefore greater attention must be paid to the issue, repeating his comment made at a press conference on the sidelines of a G20 meeting of central bank governors and finance ministers in Shanghai.

Ratings agency Standard and Poor’s said in a report in July that the size of China’s corporate debt had risen to 160 per cent of GDP in 2014, from 120 per cent in 2013.

Zhou’s comments on debt highlights lingering worries among authorities about the risks of corporate defaults – a potential danger point for a cooling economy especially as investors remain wary over the recent turmoil in its markets

The central bank’s Zhou said some short-term speculative money may be leaving China, a reversal of the trend a few years ago when China saw big capital inflows, but the current flight of money was not worrisome.

Recent data showed net foreign exchange sales by the central bank and commercial banks dropped in February as the yuan stabilises, partly due to the dollar’s broad retreat as expectations cool on further interest rate rises by the US Federal Reserve.

Analysts say China’s central bank still faces a tough job stemming capital outflows, citing persistent downward pressure on the economy.

The government would make preemptive policy adjustments to help keep economic growth within a reasonable range, Vice Premier Zhang said, reaffirming the official stance.

The government also needed to curb risks in the stock, debt, currency and property markets, prevent “cross infection” between the markets and ward off systemic risks in the economy, Zhang said.

China would press ahead with “supply-side reforms” to cut excess industrial overcapacity, focusing on such sectors as coal, steel, aluminium and plate glass, he added.

The government has set a growth target of 6.5 per cent to seven per cent for 2016, after the economy expanded 6.9 per cent in 2015 – the slowest pace in 25 years.

Beijing has pledged to make monetary policy more flexible this year even as it leans more on increased fiscal spending and tax cuts to support economic growth and cushion the pain from structural reforms.

Finance Minister Lou Jiwei told the forum that he saw little market impact caused by Moody’s recent downgrade of its outlook on China’s government debt.

On March 2, Moody’s Investors Service lowered its outlook on Chinese government debt to “negative” from “stable”, citing uncertainty over authorities’ capacity to implement economic reforms, rising government debt and falling reserves.

“I don’t care too much about its ratings,” he said, adding that the government will be able to deal with the problems cited by the ratings agency.

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TIMES OF MALTA | China economy improving, capital outflows are cooling

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