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Central Bank Boss Zhou Xiaochuan on China’s Economic Prospects

Oct 17 , 2017


Governor Zhou Xiaochuan of the People's Bank of China and Jacob A. Frenkel, Chairman of the Board of Trustees of the Group, at the 2015 International Banking Seminar in Washington, D.C. (Group of Thirty)

On October 15, 2017, Governor Zhou Xiaochuan of the People’s Bank of China, the central bank, spoke on China’s economic prospects in the Group of 30’s International Banking Seminar in Washington D.C. He attended this event on the margin of IMF/World Bank annual meetings. The following are the highlights of his speech:

GDP Growth Rate

China’s annual GDP growth rate has been declining for years, from double digit growth in the past to around 8 percent in 2012, then down further to 6.7 percent in 2016. The momentum of GDP growth has picked up this year. The GDP growth was 6.9 percent in the first half and is expected to reach 7 percent in the second half of this year. The driving force is mainly the fast growing household consumption. Household consumption is shifting from traditional product consumption to service consumption. As such, development of the service industry has accelerated. The added value of the tertiary industry as a share of GDP grew substantially from only around 40 percent 15 years ago to 55 percent currently. Economic growth has supported a stable employment situation. In the first eight months, about 10 million new jobs have already been created in urban China. The CPI and PPI grew at 1.8 percent and 6.3 percent respectively year on year, and nominal GDP growth is around 9.5 percent.


The leverage ratio of the economy as a whole is relatively high. If we decompose the debt to GDP ratio, government debt ratio is not high; the household debt to GDP ratio is still low but growing. The major problem is the fairly high corporate debt to GDP ratio. People may ask why the corporate sector had such a high leverage ratio and why the financial institutions, especially the commercial banks, were willing to lend so much to them. One of the reasons is that in China the local governments borrowed heavily through various financing platforms and this borrowing was included in the statistics of corporate debt. Thus the debt of the corporate sector has been overestimated. To study China’s leverage ratio, it is necessary to look not only at the corporate sector, the state-owned sector, and bank credit, but also to look at the borrowing of local governments in relation to promoting urbanization.

Excess Capacity and Urbanization

China has implemented a program to cut excess capacity in the steel and cement industries. Rapid urbanization and a large infrastructure expansion program have led to excess capacities of steel and cement, which are needed in both programs. Infrastructure has already improved substantially, but urbanization is still continuing. Based on household registrations, the urbanization rate is only 40 percent, but by the official population census, it is about 50 percent. Urbanization is still going on rapidly and continues to generate strong demand for steel and cement. The Chinese Government intends to promote structural reform and optimization, and attaches great importance to environmental protection. Therefore, the Government has voluntarily undertaken to cut steel and cement capacity by ten percent. Progress has been made in removing excess capacity and the government expects the goal can be achieved.  

Sector Shifts and Financial Stability

The Chinese manufacturing sector has shifted a lot of labor-intensive capacity into ASEAN countries. More and more Chinese investors are investing in Africa and moving some capacity there. Therefore, service industry is accounting for an increasingly larger share in the Chinese economy, which is a very good phenomenon. The service industry, however, is not competitive. We have some strong sectors but still need to strengthen the relatively weak sectors, such as education and medical services.

This July, a decision was made in the National Financial Work Conference to set up a Financial Stability and Development Committee. In the future, the focus will be on four areas: shadow banking issue, asset management sector, internet finance, and financial holding companies. Going forward, we will further deepen reform, gradually push forward the deleveraging process, and strengthen regulatory coordination to promote healthy development of the financial markets and maintain financial stability.

(China-US Focus compiled this report based on news reports and information available on the PoB website)

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