A U.S. economist at a prominent Chinese university reportedly has warned that if China’s bad debts were written down, its economic growth rate would be half the recorded number.
In a speech in Shanghai this week, Michael Pettis, professor of finance at Peking University, warned that China’s debt is closely linked to the government’s perceived overstatement of its gross domestic product (GDP), the South China Morning Post reported.
The government is accused of perpetuating the existence of “zombie companies”, by granting loss-making companies loans. Banks in turn treat these companies as creditworthy, whereas in reality they should be written off as bad debt, Pettis said.
“If you believe there is bad debt that has not been sufficiently written down, you must believe that China’s GDP is overstated, relative to what it would be in any other country. That must be true,” Pettis said.
“If we are able to calculate GDP correctly, it would probably be half of the recorded number.”
Meanwhile, weakness in the service and farm sectors slowed China’s economic growth in the fourth quarter, despite a strong pickup in construction activity, official data showed in late January.
Services grew 7.4 percent from a year earlier, slowing from 7.9 percent in the third quarter, while growth in agriculture slowed to 3.5 percent from 3.6 percent, the National Bureau of Statistics (NBS) said.
The sector-by-sector breakdown follows release of headline GDP figures on Monday that showed China’s economy in the last quarter expanded at its slowest rate since the global financial crisis due to faltering domestic demand and an ongoing trade war with the United States.
The services sector accounted for almost half of gross domestic product in the quarter by value as China continued to transition towards a service-oriented economy, while agriculture contributed about 10 percent, according to Reuters’ calculations based on the latest data.
Services suffered a broad-based slackening from real estate to tech, as these industries braced for more cautious investor lending and softer consumer demand.
Real estate growth slowed to 2 percent year-on-year in the fourth quarter from 4.1 percent a quarter earlier, as government tightening measures to curb speculation and skyrocketing prices subdued overall demand. The sector contributed 6.4 percent to GDP in the quarter.
The retail and wholesale sector slowed to 5.5 percent from 6.2 percent as consumption of physical goods lost momentum. Auto sales in the world’s biggest car market shrank for the first time since the 1990s.