Q. and A.: Ning Zhu on the ‘Guaranteed Bubble’ in China’s Economy
In his new book, “China’s Guaranteed Bubble,” Ning Zhu, a professor at the Shanghai Advanced Institute of Finance, dissects the risks accumulating in China’s economy, especially in its financial sector. In an interview, he explained his argument that the Chinese government’s implicit guarantees to banks, state-owned corporations, local governments and investment areas such as the housing and stock markets have encouraged levels of leverage that are increasingly hazardous as the country’s economy slows.
上海交通大学高级金融学院教授朱宁在其新书《刚性泡沫——中国经济为何进退两难》（英文名"China's Guaranteed Bubble"）中，剖析了中国经济、特别是金融行业的风险积累。他在一次采访中解释刚性泡沫时说，中国政府为银行、国有企业、地方政府，以及诸如楼市和股市等投资领域提供的隐性担保，鼓励了高杠杆率，其危险性随着经济增长放缓而越来越大。
Q. What do you mean by a “guaranteed bubble”?
A. There are two major messages in the title. First, that well-intended guarantees eventually lead to a bubble. It’s conceivable that if investors believe their investment returns are guaranteed, they will use ways, such as increasing leverage or opaque financial innovations, to take greater risks, leading to overspeculation and a bubble in asset prices.
Second, without meaningful structural reform in the Chinese economy and financial sector, what’s been going on in the past few years will eventually lead to a bubble. A bubble and subsequent bust are not a matter of whether, but when. Overspeculation leads to poor investments, and the debt overhang becomes so big that it eventually causes the bubble to burst. I hope this book will serve as a wake-up call, because the window for defusing this time bomb is closing, given how fast debt has increased in the past few years.
Interestingly, some readers in China complained about the title. Some thought I meant that the bubble is guaranteed by the government and therefore will never burst. There are a lot of people scared of the bubble bursting, but just as many who believe we’re already in a bubble and are waiting for the bubble to burst to snap up assets.
Q. Are you among the economists who believe a hard landing is inevitable?
A. No. I tend to think that we are at a crossroads where what we do now may have profound, even irreversible, influences on the Chinese economy. There are certainly many short-term challenges, such as slowing growth, increasing unemployment and disappointing capital market performance. However, if policy makers decide to sacrifice long-term growth to solve short-term problems, we’ll be facing even greater problems. In some sense, the challenges that China’s economy faces now are consequences of the 2009, 4 trillion renminbi [$586 billion] stimulus package and accompanying credit expansion.
So no, I don’t think it’s inevitable, as long as China engages in active reform. However, time is running out. With ballooning debt and slowing growth, the Chinese government will have fewer deployable resources going forward. Given the already high valuations in the stock market and housing market, it’s not clear how far one can push the bubble without it bursting and having a catastrophic impact on China and the global economy. Now that China shoulders a large portion of global economic growth, whatever happens in China will have far-reaching implications for the rest of the world.
Q. What should the Chinese government do to address the imbalances and risks you describe?
A. I listed three guarantees the government provides to the economy: a policy guarantee, capital guarantee and investment guarantee. Each one encourages people to invest and speculate. Many people in China buy real estate because they believe that the government will not let housing prices fall. Similarly, many Chinese who don’t know much about investments poured money into the stock market, because they believed the government would ensure that the stock market rose.
To diffuse the risks, the government has to phase out its guarantees. It should stop providing guarantees for economic growth and investment performance and let the market play a maximum role in allocating resources.
Q. What’s your view of the policy proposals that have come out from the National People’s Congress?
A. They’re pointing in the right direction. However, it’s worth pointing out that it’s the implementation of the policies that will define China’s future. State-owned enterprise reform, fiscal and taxation reform and financial reform have become key reform areas in almost all N.P.C. policies of the past several years. However, because of the dedication to short-term economic growth, many of the necessary reforms have been put on hold or even reversed.
Q. What reactions have you received from readers of the Chinese edition?
A. Somewhat surprisingly, it’s been well received not only among ordinary readers, but also government officials. I’ve given speeches at government agencies, and the audience has agreed with me on the urgent need for further reforms. There has also been a lot of interest from banks and shadow-banking companies. They feel that the “implicit guarantees” that have propelled their industries are being phased out and are preparing for the transition.
I’d like to add that this challenge is not unique to China. In the February G-20 central banker and finance minister summit meeting, leaders from major economies agreed to use more active fiscal policies to boost global economic growth. We may have reached a point, at least in some major economies, where leaders are setting unrealistic objectives for economic growth. I think global leaders need to realize that high economic growth is very difficult to achieve after a certain threshold, and can in fact cause much unwarranted risk for future generations.