Home >politics >policy >Slowing China a threat to global economy: Raghuram Rajan

Mumbai: Slowing Chinese growth and risks from its over-leveraged sectors pose a key threat to the global economy, Reserve Bank of India (RBI) governor Raghuram Rajan said on Thursday.

“Combined with the previous bouts of leveraged expansion, China now has a number of sectors that suffer from the twin ailments of over-capacity and high leverage," Rajan said in his inaugural speech at a symposium.

Rajan raised concerns on the rising bad loans of Chinese banks and weaknesses in the shadow banking system of the world’s second largest economy.

“Bad loans in the banking system are likely to grow over current levels—stressed loans are estimated to be around 5.5% of the bank loan book today. In addition, there may be serious weaknesses in the shadow banking system, which could feed back to banks. Clearly, cleaning up the financial system will be a challenging, but necessary task," Rajan said.

Rajan, as RBI governor, too, has embarked on a massive clean-up of Indian banks’ balance sheets after an asset quality review (AQR) concluded by the central bank in December. RBI has forced banks to recognize a big chunk of stressed loans as bad and make provisions for them. The resulting provisions wiped out quarterly profits at most public sector lenders and many reported quarterly losses as well.

This clean-up will ensure banks can lend to support growth, Rajan said.

The RBI governor, however, said the exposure of Asian banks, including those of India, to Chinese banks is minuscule and, therefore, they are not facing a direct threat.

“However, some of our countries, though not India, have significant borrowing from Chinese banks, and these borrowings could become costlier if Chinese banks turn inwards. Moreover, financial market losses in China can heighten the risk premia that industrial country investors will charge for investing in our region, and the result could be capital outflows of the kind that were seen last August and early this year," he said.

Noting that China surpassed the US as the largest trading nation in 2013, Rajan said the slowdown in Chinese growth will have effects worldwide. He expressed confidence that Chinese policymakers would mitigate the potential downside.

Nevertheless, Rajan said south Asian countries have to take steps to limit the impact of external uncertainties such as the next rate hike by the US Federal Reserve, a possibly sharp downturn in the Chinese economy, the proposed exit of Britain from the European Union and volatile capital flows.

Stating that Indian policymakers, including RBI, had adopted several step to mitigate the impact of external shocks, Rajan listed the government’s reforms and fiscal consolidation path along with RBI’s new monetary policy framework as steps that would safeguard the economy.

He said RBI has been careful about foreign currency borrowings and holdings of Indian debt by foreign investors.

He added that the central bank had been building foreign exchange reserves and the RBI’s regular intervention had ensured that despite a current account deficit, the Indian rupee has remained relatively stable. “We have about $360 billion (forex reserves), plus forward positions to offset possible forward liabilities. We also see merit in pooling reserves, and have a contingent reserve agreement with BRICS countries, and a currency swap arrangement with SAARC countries," Rajan said.

BRICS stands for Brazil, Russia, India, China and South Africa. SAARC is short for South Asian Association for Regional Cooperation.

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