UBS: China - der Drahtseilakt der Entschuldung
Significantly, the warning about the potentially severe consequences of excessive optimism and the build-up of debt within China came at the country’s high profile National Party Conference (NPC) in October. Given the context and unusual frankness of the comments, Xiochuan’s assessment was, in our view, as clear an indication as investors get in China that the authorities are serious in addressing the issue of high debt levels.
This has not always been the case. Conflicting political and economic interests have historically resulted in inconsistent policy objectives and a familiar boom/bust cyclical narrative. In particular, an explicit and somewhat arbitrary growth target for GDP effectively encouraged significant debt-financed investment at local government level.
But times are changing. And while a relatively steady growth rate is still important as China builds towards the 100th anniversary of the founding of Communist Party in 2021, the omission of specific GDP growth targets in Premier Xi Jinping’s keynote NPC address was, in our view, particularly notable. We see the omission as further compelling evidence of the shift in China’s policy priorities towards the quality and sustainability of growth, rather than just the pace of growth. With Xi’s position not merely secure but emboldened, the Chinese premier now has a clear mandate to build further on deleveraging progress to-date.