June 2, 2014 1:00 pm JST

China's growth may fall below 7% in 2014, says JBIC's governor

SETSUO OTSUKA, Nikkei senior staff writer

TOKYO -- China's economic growth could fall below 7% in 2014, as the country's export competitiveness starts to show signs of decline, says Hiroshi Watanabe, governor of the Japan Bank for International Cooperation.

     Given the delays in addressing bad loans at financial institutions and excessive production capacity, China may fail to secure funds for social security and cope with the rapid aging of its population "unless something is promptly done," Watanabe told The Nikkei in a recent interview.

     China will be the first nation to become an aged society before developing into an advanced nation, he said.

     The concern is that many elderly Chinese are short of assets, and pension programs are underfunded.

     Watanabe, a former Japanese vice finance minister for international affairs, pointed out that the equivalent of more than 100 trillion yen ($974 billion) may be needed for the disposal of financial problems in China, such as for a capital injection into the banking system.

Picking up, slowly

The Chinese government may tap its foreign exchange reserves for the task, Watanabe said, adding that Beijing will in such a case sell U.S. government bonds, a main tool of its financial management.

     China is the world's largest holder of U.S. government bonds. Commenting on the confusion that would be created by China's sale of these bonds, Watanabe said, "Since the U.S. and China must be linked to each other to some extent for the sake of mutual benefits, they may work out a long-term scheme such as the Federal Reserve Bank of New York extending loans on security of U.S. government bonds and China repaying them by selling the bonds in a piecemeal and planned manner."

     The world economy is recovering, but weakly, as concerns linger about a possible long-term slump of the U.S. economy and China's financial problems.

     But Watanabe, who succeeded Hiroshi Okuda, a former president of Toyota Motor, as governor of the governmental JBIC last December, was hardly pessimistic, saying that the world economy is expected to pick up by stages from summer next year.

     "The top three advanced economies will grow together for the first time in years, as Japan and the U.S. began to turn upward last year while Europe is rebounding," he said. "Though China and Brazil are matters of concern among emerging economies, others will fill gaps bit by bit" in the world economy.

     Regarding some experts' view that the U.S. economy has begun a long-term slump, Watanabe said it has entered a growth mode of nearly 3%, though it will experience moderate ups and downs.

Bond concerns

The U.S. population will continue to increase for some time, and the country's agriculture and services sectors have room for further growth among other favorable developments, such as the shale gas revolution, he said.

     Asked why, then, long-term interest rates are held low in the U.S., Watanabe noted that while the U.S. Federal Reserve has kept short-term rates low, investment money, which has returned to the U.S. from emerging economies since last year in expectation of future rate hikes, is flowing into the bond market.

     As investors have flocked back to U.S. government bonds to chalk up certain risk-free yields, interest rates have fallen based on their inverse relationship with bond prices, Watanabe said.

     The world bond market is now bloated, according to Watanabe. "Funds three to four times more than before are moving beyond national borders, and their impact needs to be closely monitored," he said.

     With regard to Prime Minister Shinzo Abe's policy mix, dubbed Abenomics, Watanabe said there will be no additional easing of credit by the Bank of Japan,"except for some extraordinary reason."

     Even if the rate of inflation falls short of the central bank's target of 2%, BOJ Gov. Haruhiko Kuroda will likely declare the achievement of the goal if the gap is minimal, Watanabe said.

     Any doubts in the government's economic growth strategy come down to the fate of the "third arrow" of Abenomics, structural reforms,  he said.

     In light of growing market skepticism about the possibility of the third arrow working, Abe's government needs to demonstrate that it can break up vested interests, Watanabe stressed.