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Tags: Hank Paulson | Financial Times | China | Damage Economy

Hank Paulson to FT: China Risks 'Real Damage' to Its Economy

By    |   Monday, 15 June 2015 03:02 PM EDT

Former US Treasury Secretary Hank Paulson warns that China risks “real damage” to its economy if it doesn’t quickly reform state-owned enterprises and ditch its overwhelming debt.

“Until the state-owned enterprises (SOEs) are put on a level and competitive playing field, it’s going to be difficult to have the marketplace work efficiently in some key sectors of the economy,” Paulson told the Financial Times. “Reform of the SOEs has been moving too slowly.”

Paulson was involved in the initial public offerings of state giants such as China Mobile, now the world’s largest mobile network operator, on the Hong Kong stock exchange, the FT reported.

The Chinese government usually kept more than three-quarters of their equity and is reluctant to allow private competition in “strategic sectors.”

“[Jobs and growth] have to come from the private sector,” Paulson said. “You have to free up sectors like finance and energy and telecommunications and really open up the services market. There will be real magic when they do that,”

Paulson sees warning signs in another economic aspect as well.

“The leverage at municipal level is not sustainable,” Paulson said. “There are obviously some real losses there. Today they are manageable, but the longer you prolong this there’s a much greater danger that this will spill over and do real damage to the economy.”

The U.S. seeks to rekindle enthusiasm among multinationals frustrated by Chinese market access restrictions, the FT reported.

“Because it’s become more challenging to do business in China, [U.S. companies] are no longer such vocal advocates for the importance of the U.S.-China economic relationship,” Paulson said. “Congress is hearing about the problems rather than the opportunities.”

Meanwhile, economists at China's central bank have sharply lowered their inflation forecast for 2015, while predicting a pick up the world's second-biggest economy during the next six months thanks to more stable home prices and firmer foreign demand, Reuters reported.

People's Bank of China (PBOC) economists forecast annual inflation of just 1.4 percent this year, lowering their estimate from 2.2 percent earlier.

The report specified that the estimates represented the view of the economists and not that of the PBOC. The economists were cautiously optimistic, despite downward revisions to other forecasts that reflected the headwinds faced by the stuttering economy.

China's sagging property market is "starting to stabilize" and the world economy should show further signs of recovery in coming months, said the economists who were led by Ma Jun, the cental bank's chief economist.

But others share Paulson’s fear that China is indeed in deep trouble.

Bloomberg View columnist Clive Crook was quite blunt in a recent commentary: China's bubble will burst.

He points out that the Shenzhen market is up almost 200 percent over the past year. Its price-earnings ratio stands at a little less than 80. (Standard & Poor's 500 Index is up 9 percent and has a ratio of 19.)

“All this as the economy slows down. If it isn't a bubble, I don't know what is,” he wrote. “The more it inflates, the greater the damage when it bursts.”

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Former US Treasury Secretary Hank Paulson warns that China risks "real damage" to its economy if it doesn't quickly reform state-owned enterprises and ditch its overwhelming debt.
Hank Paulson, Financial Times, China, Damage Economy
Monday, 15 June 2015 03:02 PM
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