China’s policymakers are “overly aggressive” in containing debt, a leading Chinese economist told CNBC, while admitting that the economy has not fully recovered from the pandemic.
China, where the coronavirus was first discovered, was the only major economy to grow over the past year. The country recorded 2.3% year-over-year growth in 2020, driven mainly by exports, while the recovery in consumption lagged.
“Overall, I would say that the economy, the Chinese economy, has not returned 100% to normal. I’d say it’s 90% back to normal, ”Li Daokui, economics professor at Tsinghua University told Martin Soong during the CNBC Evolve Global Summit on Wednesday.
Chinese flag flies in front of the cityscape of Shanghai.
Eternity in the blink of an eye | Stone | Getty Images
Li, a former advisor to China’s central bank, said policy makers should give the economy more time to recover before taking action on the debt. He said consumer spending had not returned to pre-pandemic levels and some companies in the service sector were still struggling.
There are signs that China has begun to contain its debt.
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Chinese economy’s indebtedness continued to rise over the past year as authorities tried to make it easier for companies to obtain credit to help tackle the challenges posed by Covid-19.
Chinese authorities tried to stem further growth in borrowing Even before the pandemic, they feared that increased debt would endanger the health of the world’s second largest economy.
Risk of capital flight from China
Li also warned that the relative strength of the US economy increases the risk of capital flight from China and other parts of the world. Capital flight occurs when funds or assets leave one country while another offers better investment returns or opportunities.
“Not only will foreign money officially invested in the Chinese economy be looking for an alternative to return to the US, but a lot of Chinese domestic money is being lured away from the Chinese economy.
Li Daokui
Economics Professor, Tsinghua University
The professor said that an economic recovery in the US would increase the possibility for the Federal Reserve to normalize monetary policy. That will attract funds from other countries to the US, he added.
“Not only will foreign money officially invested in the Chinese economy be looking for an alternative to return to the US, but a lot of Chinese domestic money will be lured away from the Chinese economy,” Li said.
“It is an overall risk for the whole world,” he said, adding that the threat is greater for economies like India and Brazil, which “are still suffering from the coronavirus”.
Some economists anticipate that the US Federal Reserve will begin to curb its asset purchase program as early as the end of this year. But they say one A rate hike cannot take place until 2023.
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