Abstract

After the international financial crisis broke out in 2008, the Chinese government adopted very relaxing fiscal and credit stimulus policies to cushion the negative impact from the shrinking export to Chinese economy. A direct result of those policies is that while Chinese economy maintained relatively stable and high-speed growth, its economic leverage ratio has kept rising. In 2016, the debt-to-GDP ratio in China reached 279% from 147% in 2007, and climbed up by 21 percentage points in 2016 alone, which was equivalent to an increment of USD4.5 trillion. In other words, when China's nominal GDP increases by one yuan, there is about six yuan of new debt.

The high leverage ratio has obviously become a major challenge to the current Chinese economy. When this administration came into power, deleveraging was made one of the important policy goals, and it was the most important one of the five economic policy tasks in 2016. But deleveraging policies didn't achieve the expected effects in 2016, and China's economic leverage ratio further increased.

According to the latest financial statistics released by the central bank, RMB 12.65 trillion new loans were granted in 2016, a new record with a year-on-year increase of RMB 925.7 billion. Among that, corporate loans decreased by RMB 1.28 trillion year-on-year, while "residents' medium- and long-term loans", most of which was housing mortgage loan, increased by RMB 5.68 trillion, accounting for nearly 45% of all new loans. To destock the real estate industry and relevant energy and raw materials industries, the Chinese government launched large-scale stimulus policies in the credit and real estate industry in the first half of 2016, but those policies prompted the rebound in energy and raw material price and made it difficult to effectively reduce their production capacity. Meanwhile, as the real estate market and urban economic development was extremely imbalanced, the stimulus policies aggravated the housing price bubble in tier-1 and some tier-2 cities that used to have a small stock, but they failed to boost the real estate market in most lower-tier cities. As a result, the task of real estate destocking wasn't accomplished.

In the past few years, the Chinese economy has been in a struggle between stabilizing growth and deleveraging and adjusting structure. Is the current macroeconomic regulation sustainable? What caused the continuous rise of economic leverage ratio and the slow progress in structural adjustment? This paper hopes to provide an explanation by analyzing the internal conflicts in China's current political and economic structure. It will put forth a series of political conditions that are needed for effective deleveraging and structural adjustment, and propose specific reform plans that can be adopted for economic transformation, with land management and fiscal system as examples.