Nomura Research Institute (NRI), a leading provider of consulting services and system solutions, has held the Japan-China Financial Roundtable since 2012 as a research forum where experts share their insights into the issues confronting the Japanese and Chinese economies and financial systems, as well as their thoughts on ideal policy measures.
At the 2022 Annual Meeting, the 13th meeting in total celebrating the event’s 10th anniversary, nearly 120 persons took part hailing mainly from the executive management of Japanese and Chinese policy authorities, research agencies, and financial institutions. The participants engaged in spirited discussions on how the prolonged spread of COVID-19 and Russia’s war in Ukraine are producing a rapidly changing international environment. We spoke with Tetsuya Inoue, a member of the Financial Market & Digital Business Research Department who put together a report on the 13th meeting, asking him about the details of the meeting and the state of the Chinese economy.

Rapidly changing global conditions and the future of the Japanese and Chinese economies

The global economy is currently becoming increasingly fragmented because of the COVID-19 crisis and the war in Ukraine. How are Japan and China dealing with this fragmentation, and how can they contribute to solving global issues? And with the real estate pricing problem becoming more severe, how will China’s financial system handle the long-term slowdown in economic growth? Based on these concerns, two topics were chosen for this year’s meeting as themes for 2022: “Japanese and Chinese Economic Conditions and Global Economic Governance” and “The Transformation of Economic Growth Models and Financial Stability”.

Addressing the first theme, “Japanese and Chinese Economic Conditions and Global Economic Governance”, were two experts from the Chinese side: Mr. Yu Yongding, a member of the Chinese Academy of Social Sciences, and Mr. Wang Xin, the Director-General of the Research Bureau of People's Bank of China. They were joined by two colleagues from Japan: Mr. Ryozo Himino, the former Commissioner of the Financial Services Agency, and Mr. Kazuo Monma, the former Executive Director of the Bank of Japan. After giving their opening remarks, the participants engaged in a lively discussion on this topic.

A look at Chinese economic trends reveals that China’s real GDP growth rate in the second quarter of 2022 was significantly lower than in the previous quarter, and it was only slightly higher year-on-year. Following the global economic boom in 2017, China’s economy grew by 1.6% in the first half of 2018 and by over 6% on an annualized basis, and then it showed a dramatic recovery from the COVID-19 slump, growing steadily from the second half of 2020 into the first half of 2021. However, since the latter part of 2021 its momentum has begun to slow down, and the pace of growth has gradually been slackening.

Meanwhile, if we look at the PMI (Purchasing Managers’ Index), we can see signs that sales order activity is recovering in the manufacturing and non-manufacturing sectors, making it clear that the effects of the so-called “zero-Covid” policy are subsiding and that the resumption of economic activity is having an effect. And although the first half of 2022 saw a continued moderate slowdown in capital investments, economic policy measures have been effective in helping infrastructure investments grow at a relatively quicker pace. The drop-off in manufacturers’ investments—which had slowed down noticeably—also seems to be stabilizing recently.

With regard to the financial system, while the value of bad debts has continued to rise slightly, lending overall has been on the rise, meaning that the ratio of nonperforming loans (NPL ratio) has remained stable. That said, the fact that the NPL ratio in the commercial banking realm has gradually been rising is a problem, and the Japanese experts even noted that perhaps this issue is not being handled properly.

When it comes to prices, although the CPI (Consumer Price Index) growth rate has gradually been accelerating, this is not the sort of high inflation being seen in the West. Meanwhile, the PPI (Producer Price Index) growth rate—particularly the prices of coal and other mineral resources—has gotten extremely high. Given this, China can likely be said to be in an import inflation scenario much like Japan is.

Under these circumstances, in terms of fiscal policy, China has been taking economic measures by accelerating the issuing of bonds to secure funding for regional governments, while on the financial front, it has been extending repayment deadlines for bank loans and incentivizing loans to micro businesses.

Mr. Wang Xin summarized the characteristics of China’s economic stabilization measures. For China, the large-scale economic stimulus policies enacted after the 2008 financial crisis have also been a major trauma, he said. More specifically, he reflected on how the country implemented 10 years’ worth of infrastructure investments in the brief span of just three years, giving rise to excess capacity and deflationary pressures. That is why China is now eschewing large-scale macroeconomic stimulus measures, choosing instead to adopt policies that focus more narrowly on things like assisting farmers and SMMEs and transitioning to a greener infrastructure.

A particular point of contention at the meeting was whether to view infrastructure investments supporting domestic demand in a positive light, or rather to see them more negatively as leading to excessive debts and business capacity. Meanwhile, in terms of increasing consumption, the reduction or exemption of the vehicle acquisition tax is extremely significant. Purchase assistance for new-energy vehicles, a policy that is being promoted concurrently, is also helping to boost the competitiveness of China’s green industries and digital industries; in a sense, it even goes beyond mere economic policy to constitute a type of industrial policy measure.

Among the Japanese lecturers, Mr. Himino expressed a concern that the COVID-19 crisis and the war in Ukraine would only exacerbate the fragmentation of the world economy or global finance, and he situated these conditions in the context of medium- and long-term global trends. Mr. Monma touched on recent circumstances in the Japanese economy, discussing measures to cope with Japan’s aging population and exchange rate issues as challenges facing Japan’s economy in the medium and long terms, and further remarking that policy responses and corporate activities premised on a weak yen might be required.

Challenges facing China’s financial system and prospects for new growth

There were another four keynote speakers for the second topic, “The Transformation of Economic Growth Models and Financial Stability”. Two speakers represented the Chinese side: Mr. Xiao Gang, the former Chairman of the China Securities Regulatory Commission; and Mr. Gao Shanwen, the Chief Economist of Essence Securities. Joining them were two Japanese speakers: Mr. Nobuyuki Kinoshita, the former Executive Director of the Bank of Japan; and Mr. Shinichi Fukuda, Professor at the Graduate School of Economics of the University of Tokyo.

Nowadays, China is embarking on a course of monetary easing, which includes lowering the loan prime rate and deposit reserve ratio, and expanding the country’s refinancing system. A characteristic of this approach is micromanagement, in the form of lowering the required deposit reserve ratios for specified categories of financial institutions, or of inducing financial institutions to lower their lending rates to borrowers in specified fields. This is consistent with the approach described earlier, whereby China is avoiding giving “handouts” under its fiscal policy measures and instead is focusing on industries and SMMEs that were hit especially hard by COVID-19 and the war in Ukraine, while also emphasizing climate change measures such as switching to low-carbon energy with the aim of making meaningful long-term investments for its society.

Meanwhile, the value of China’s foreign exchange reserves—which rose consistently since the 2000s and then peaked in the first half of the 2010s—declined during the China Shock of 2016 and 2017 when the country implemented measures to prevent capital outflow and the depreciation of the Renminbi, but then between 2017 and 2021 it gradually increased again. What is remarkable when one compares this against the country’s imports or foreign debt is that while this amount has fallen continuously since the 2010s, the value of private net external assets has increased significantly. In other words, the private portion of China’s external buffer has only grown, and thus the fact that its foreign exchange reserves have become less substantial is perhaps not a particularly large problem.

Given these circumstances, it was to the U.S. external imbalance that Mr. Yu, one of the speakers for the first topic, decided to turn his attention. He noted that there are two factors behind why the U.S. can maintain its external imbalance, namely that the rate of return for its foreign debt is lower than its GDP growth rate, while the rate of return for its foreign assets is higher than that for its foreign debt. Both elements depend on economic conditions and the attitudes of foreign investors. In light of the foregoing, he pointed out, China needs to scale down its foreign exchange reserves in order to attain a higher rate of return for its foreign assets by expanding private investment.

In addition, with U.S.-China trade frictions becoming more serious, the Chinese participants also indicated their concerns regarding the risk that China’s foreign exchange reserves could become frozen. The fact is that China now cannot help but be aware of the risk of financial sanctions, of the sort that Western nations have placed on Russia. Regarding this point, they also opined that if China can stabilize its current account balance by promoting domestic industrial policies and strengthening its competitiveness, ultimately its foreign exchange reserves will also reach appropriate levels.

They further pointed out the risk that the U.S. might intentionally accelerate the pace of inflation to reduce the substantive burden of its foreign debt. This is because in that case, China—which holds a large amount of U.S. Treasuries—would incur a massive loss. Mr. Xiao observed that in order to deal with this risk, domestic investment earnings for Chinese corporations would need to improve.

Another focus of the discussion was how best to promote domestic demand in China. In particular, stimulating consumption and getting away from excessive dependence on investment poses a major challenge for China’s economy. However, it was also pointed out that a rapid growth in consumption could potentially harm the country’s current account balance through an increase in exports.

Mr. Gao summarized the features of the structural transformation of the Chinese economy from a more long-term perspective. In the past 10 years, he noted, the Renminbi’s real effective exchange rate and the manufacturing export share of the global economy have risen in parallel, and in that sense the international competitiveness of Chinese industry has improved. He further recognized that while the majority of this share is owed to specific industries such as machinery and equipment, automobiles, electric machinery, computers, and communications equipment, this growth has been backed by appropriate capital investment. He also drew attention to the fact that, as exemplified by the rapid proliferation of mobile internet services and new-energy vehicles, this improvement in competitiveness has been most notable in industries where innovation has created opportunities for China to catch up to the West.

In light of these discussions, upcoming meetings will seek to address how the Japanese economy can cope with massive changes in international conditions, focusing on growth strategies and economic security with particular attention to topics on which Japan and China can cooperate, such as dealing with an aging population and creating a low-carbon economy, developing more resilient and transparent supply chains, rebuilding international monetary structures and the international financial system, and global competition including digital currencies.