In January 2014, HSBC’s flash purchasing managers’ index (PMI) for China showed its first contraction in six months. PMI fell below the 50 percent threshold, and it has continued to decline, from 49.5 percent in January to 48.3 percent in February. If growth weakens, China could be heading towards a domestic debt crisis. Will the reforms announced in November after the Third Plenum of the 18th Chinese Communist Party Central Committee lead to a more sustainable model? In the short term, the reform programme does imply slower growth. This week’s session of the National People’s Congress (China’s parliament, which meets once a year in March) could provide some important indications on how to read the weaker PMI and what reforms to expect in the near future.

A recent informal meeting between representatives of major German firms and a group of China-watchers gave evidence of the current uncertainty felt by European corporate actors who deal with China. China used to display the fastest market growth in the world. But now, it has entered a phase of very diverse challenges that will affect its future development and stability.

One view expressed by some of the entrepreneurs is that the weaker PMI could help motivate the Chinese leadership to speed up the pace of reform. Thus, the apparent weakness could in fact work to support economic growth and market confidence. Helpful reforms would include combatting the environmental crisis through cutting back on coal and steel production and establishing higher environmental standards for Chinese factories, fighting corruption at all levels, and deregulating state-owned enterprises (SOEs). A strong move toward tangible SOE reform, by encouraging more private investment in state-controlled enterprises, could be extremely significant. In the future, private investment could be allowed in finance, telecommunications, and infrastructure. This would be the most important step forward since the original policy of “reform and opening up” in 1978. Sinopec, for example, has become the first of the three big state-owned oil companies to introduce private capital into its business (the others being PetroChina and China National Offshore Oil Corp). Allowing private capital to enter major industries previously closed to it could boost overall investment and economic growth.

Optimists argue that positive trends will unavoidably result from greater access for investment by foreign firms and from the private sector, already the most dynamic part of China’s economy and the major source of innovation for Chinese enterprises. The new Chinese leadership has shown its openness to reform, but actual implementation will take time. Also, it seems inevitable that the day will come when the economy slows down. But this will not have solely negative effects – it will also provide the chance to stabilise the market at slower growth. The Chinese leadership is expected to stick to its comparatively modest growth target of 7.5 percent. Even so, China has one of the strongest markets in the world and its economy is expected to overtake that of the United States by the end of this decade. China’s investments in Europe are a good example of its growing economic strength. In 2004, Chinese investors (from the mainland and from Hong Kong) bought 34 European companies. By 2013, Chinese companies’ interest in Europe had increased significantly, and 120 acquisitions were made. China is the sixth most important foreign investor in Germany, after the US, Britain, Switzerland, France, and Austria.

So why worry? Well, not all the business executives at the conference were bullish. One of the participants summed up his scepticism: “They start privatising as they need money.” Almost all reports covering China’s National Audit Office (NAO) figures released last year indicate that local governments bear nearly 18 trillion yuan of debt, including 10.9 trillion yuan of direct debt, around 2.7 trillion yuan of credit guaranteed by local authorities, and 4.3 trillion yuan of contingent liabilities. This amounts to an increase in debt of 55-60 percent since the end of 2010. The figure reflects massive bank lending through local governments. But adding the costs of recapitalising state-owned banks, as well as state-owned bonds including railway bonds, China’s total debt would have to be estimated even higher – rough figures vary from 50 to 70 percent of GDP.

The audit also highlighted the problems with the debt rollover practice in China. Currently, Chinese banks are rolling over around half of all loans every three months and a further 25 percent every six months. Chinese banks rolled over around three-quarters of all loans to local governments at the end of 2012. And around 60 percent of debt is expected to mature by the end of 2015. This means that new credit is being used to service existing debts instead of funding new investment. And it also shows that there are quite a few unknowns that, if quantified, would raise the official figures. One of the economic experts put it succinctly: “We don’t know how high the debt really is, what to expect from China’s shadow banking system in terms of risky undisclosed loans, or how to evaluate artificial figures, such as in the real estate market. We are flying in the dark.” Another expert asked: “What do you build when your building is completed? How can you generate growth? The situation is not hopeless but it is quite tense. The Chinese finance system is under stress.”

One thing, however, seems to be clear. The reforms announced by the Third Plenum last November must be implemented. Reform is absolutely necessary if an economic crisis is to be avoided. As for the SOEs having more debts than assets, the Chinese government has lost trust in them almost to the degree that foreign observers have. For this reason, it is likely SOE reform will be pushed through. In other areas, scepticism might be more justified. China has too often announced far-reaching reform measures, but in the end only been able to “muddle through”. And the past might repeat itself: foreign investors, businessmen, and managers might become the perfect scapegoat for China’s leaders, similar to the way in which Google, Apple, and especially Japanese firms have been at different times blamed for economic or social conflicts.

It is not yet clear what the National People’s Congress will do in the short term, or whether a debt crisis or a large-scale financial and economic crisis will hit China in the longer term. But optimists and sceptics at the conference both agreed on the way one participant framed the situation: “In China a crisis is coming and the only question is how we respond. But China is not doomed. And for us there is no second China.”

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