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June 25, 2016

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Productivity model to add US$5.6t in economy

CHINA could generate an additional US$5.6 trillion in gross domestic product and US$5.1 trillion in household income by 2030 if the country shifts from an investment-driven to a productivity-led growth model, McKinsey & Co said in a report yesterday.

The current investment-driven model leads to continued credit expansion and might lift banks’ non-performing loan ratio to 15 percent in 2019 from the official figure of 1.75 percent by the end of the first quarter, according to a research from the McKinsey Global Institute.

Chinese banks have already spent 2 trillion yuan (US$302 billion) over the past three years to handle bad loans, and the banks would have faced an NPL ratio of over 4 percent if the money was not spent, Wang Shengbang, an official of the China Banking Regulatory Commission, said on Thursday.

McKinsey estimated that China would spend 8.2 trillion yuan to handle bad loans by 2019, and the government-led investment could further distort resource distribution, hurting productivity and making sustained economic growth more difficult.

“The old approach is clearly creating serious stress,” said Jonathan Woetzel, director of MGI.

“Our new research reveals that China has the means to head off further problems — and complete its journey toward being a fully fledged advanced economy — if it shifts to a new approach centered on productivity,” Woetzel said.




 

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