Caixin
Jan 22, 2019 08:14 PM
OPINION

Xu Zhong: China Should Not Rush to Revamp Local Debt

Xu Zhong, head of the central bank's research bureau. Photo: VCG
Xu Zhong, head of the central bank's research bureau. Photo: VCG

There are several significant features of China’s current economy: an economic transformation under the pressure of high leverage, a lack of effective demand caused by a one-size-fits-all deleveraging campaign, and slowing growth in total factor productivity (TFP) (Editor’s note: TFP is a measure of economic efficiency).

An economic transformation under high leverage requires a low-interest-rate policy, which can reduce the debt burden on businesses and their financing costs. Such a policy can help stimulate corporate investments and increase the return on investments, yet can also encourage companies to borrow more. Thus, only when the return of capital grows amid low interest rates, can a drop in the leverage ratio become possible.

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