Incoming President Xi Jinping may find China's investment-driven economic recovery in the Year of the Snake jeopardized by mounting risks in the finance industry.
Gross domestic product is poised to expand 8.1 percent this year, up from 7.7 percent in 2012, according to the median estimate of economists surveyed last month by Bloomberg News. At the same time, an increase in lending fueled by trust companies and underground banks enhances the risk of loan defaults that would be "severely damaging" to the economy, Standard Chartered Plc says.
The danger is that an economic rebound lulls policymakers into complacency, delaying market-driven changes needed to reduce dependence on investment for growth. Xi needs to rev up consumption and services and ensure credit is diverted from inefficient state enterprises to growth-generating private companies, said David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department.
"If China tries to sustain growth by adding debt and investing it inefficiently it will be like cotton candy: a short-term high with no lasting value," said Loevinger, now an Asia analyst in Los Angeles at TCW Group Inc. "The U.S. got into trouble because institutions like Fannie Mae and Freddie Mac were too big to fail. ... China's financial system is full of Freddies and Fannies."
Xi is inheriting an economy more leveraged than the one President Hu Jintao took over in 2003. Government, corporate and consumer debt rose last year by 15 percentage points to 206 percent of GDP, Standard Chartered said in a November report.
"Lots of projects have been approved to stimulate this economy," said Patrick Chovanec of Beijing's Tsinghua University. "The banks are extremely reluctant to lend to them, and that says a lot about what they really know about credit risk in this country."