Squaring the Circle: How China Can Combine Growth with Deleveraging

Tom Orlik and Fielding Chen of Bloomberg propose a two-fold solution to tackle China’s credit expansion and debt build-up.


An acrobat performs on a tightrope as the Chinese Lunar New Year which welcomes the Year of the Monkey is celebrated at Daguanyuan park in BeijingIn a new Paulson Policy Memorandum, Bloomberg economists Tom Orlik and Fielding Chen begin with China’s increasingly fraught economic situation. China, they note, has pushed into 2016 facing multiple challenges: Supply side reforms and shrinking exports threaten to throw growth and employment off course. A torrid expansion of lending has added to financial risks and raised larger concerns about the medium-term growth path. The People’s Bank of China, China’s central bank, has stabilized the yuan but the larger goal of a more market-set exchange rate has receded farther into the distance.

Orlik and Chen argue that, in the past, Chinese monetary policy has always done the bulk of the work to support growth. And while this has proved to be effective, it has come at a cost. Indeed, they describe an increasingly precarious financial situation in China: bank assets have tripled since 2008 and non-performing loans at 1.3 trillion yuan ($200 billion) are now equal to 2 percent of China’s GDP. Businesses and local governments in China carry a heavy burden of debt. Repayment has been made more difficult as overcapacity has dented prices and profits.

In this context, Orlik and Chen propose policy action across three fronts:

First, they argue for a fiscal stimulus targeted at expanding public services and raising the spending power of China’s low-income households. This, they say, would provide a boost to growth and employment but without the downsides of another credit-fueled splurge.

Second, they recommend a step change in transparency that would enable China’s financial markets to operate more efficiently. By channeling more funds to high return private and services sector firms, the Chinese financial system could generate more output bang for less credit buck.

Third, they suggest steps to revive faith in China’s short- and medium-term growth prospects, combined with greater transparency of both economic data and policy thinking. These, they say, would boost confidence, creating the conditions for the People’s Bank of China to move toward a more market-determined exchange rate.

Orlik and Chen’s memo looks at each of these measures in turn, concluding with some more granular recommendations that flow from their three arguments.


Tom Orlik

North Asia Economist, Bloomberg

Tom OrlikTom Orlik is Bloomberg’s North Asia economist based in Beijing. His work focuses on the economics of China, Japan and Korea. Orlik covers key developments in the region for Bloomberg Brief, providing in-depth analysis of macroeconomic data and policies, and how they will impact financial markets globally. Previously, Orlik was China economics correspondent for The Wall Street Journal, and China economist for Stone & McCarthy Research Associates. Prior to coming to China, he was an advisor to the UK Executive Director of the International Monetary Fund and policy analyst at the British Treasury. He is the author of Understanding China’s Economic Indicators, a guide to working with China’s economic data.

Fielding Chen

Economist, Bloomberg

Fielding ChenFielding Chen is a Bloomberg economist based in Hong Kong. He conducts real time analysis for China and writes thematic research reports about Northeast Asia for Bloomberg’s Asia and China Briefs. He was previously a senior economist for Asia at Banco Bilbao Vizcaya Argentaria. He holds a PhD in economics from Georgia State University and a Master’s degree in finance from Xiamen University. Chen is a published author of books on financial risk and the development of China’s Treasury bond market. He was an instructor at Chinese University of Hong Kong Business School.

Topics: Economy