ANNUAL REPORT

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the Chinese government’s success in pushing through financial sector
reform last year and overcoming opposition to two factors: a
strong political advocate (the PBOC) and clear objectives (getting
the RMB into the Special Drawing Rights * basket). 183 However,
without a new clear objective, the impetus for additional reforms
has weakened. (For more information on the inclusion of the RMB
into the Special Drawing Rights basket, see Chapter 1, Section 1,
‘‘Year in Review: Economics and Trade.’’)
Fiscal and Financial Challenges
The Chinese government is overhauling its fiscal and financial
systems to attempt to address the funding needs of its reform agenda.
China’s debt challenges harken back to the 2008–2009 $587 billion
(RMB 4 trillion) stimulus package, which flooded local governments
and companies in designated sectors with cheap credit, leading
to unsustainable debt burdens and overcapacity. 184 China’s
total debt to GDP has grown from 151.3 percent in 2007 to 254.6
percent in the first quarter of 2016, reaching $27.2 trillion (see Figure
4). 185 In a discussion with the Commission in Beijing, Michael
Pettis, professor of finance at Beijing University, noted that although
a banking crisis in the next two years is unlikely, the enormous
growth of debt is unsustainable. 186 According to Andrew
Polk, China director at the financial consultancy Medley Global Advisors,
the ability of the PBOC to inject liquidity through the interbank
system, the stability of large Chinese banks’ capital supported
by China’s high savings rate, and limited national exposure
to city-level banks would enable the government to manage existing
debt obligations and prevent a nationwide financial crisis. But
Mr. Polk noted that the rising number of nonperforming loans
(NPLs) could create localized financial crises in heavy industry and
SOE-dependent provinces in the northeast. 187 These rising debt obligations
raise concerns about China’s ability to finance reforms
laid out in the 13th FYP. 188 (For more information on China’s rising
debt levels, see Chapter 1, Section 1, ‘‘Year in Review: Economics
and Trade’’; for more on the challenges associated with SOE
debt, see Chapter 1, Section 2, ‘‘State-Owned Enterprises, Overcapacity,
and China’s Market Economy Status.’’)
dkrause on DSKHT7XVN1PROD with USCC
* Special drawing rights (SDR) are the International Monetary Fund’s (IMF) international reserve
asset made up of five major reserve currencies. In November 2015, the IMF determined
that the RMB had met its ‘‘freely usable’’ criterion and voted to include the RMB as part of
the SDR, validating the PBOC’s reform efforts over the last year. For more information, see
Eswar S. Prasad, ‘‘China’s Efforts to Expand the International Use of the Renminbi,’’ (prepared
for the U.S.-China Economic and Security Review Commission), February 4, 2016, 82–89.
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