No Chinese financial crisis over next three years, says S&P Ratings
Total national debt has quadrupled since 2007, to a record 250 per cent of gross domestic product by the end of last year
A growing number of commentators now fear China’s growing debt mountain has become a ticking time bomb.
But they might be worrying overly, according to S&P Global Ratings, which thinks a financial crisis is unlikely in the country within the next three years.
China’s total debt has quadrupled since 2007 to a record 250 per cent of gross domestic product by the end of last year, sparking fears among China watchers the buildup might trigger an “economic avalanche” which could effectively drag the world economy down with it.
Christopher Lee, a credit analyst at S&P Global Ratings, however says he has been getting different messages from some of the firm’s Asian investors.
“The majority of those we polled believe China is unlikely to face financial crisis over the next three years. They say there is still enough room to manoeuvre on policy, as the government tries to buy time between balancing the opposing priorities of growth against rising financial risks,” he said.
The ratings agency defines a “financial crisis” as non-performing loans (NPL) exceeding 15 per cent of total bank lending.
Lee admits the growth in Chinese debt is unsustainable, but says the deleveraging process will be “a long, drawn-out” one, which the country can handle.
The good thing was Beijing had many different policy tools to tackle the debt problem, he said.
The government has managed to rein in corporate debt, and opened various credit channels for households, which are less leveraged. And swapping bank loans for municipal bonds has lowered S&P’s concerns over local government financing vehicles (LGFV).
In March, Premier Li Keqiang proposed debt-to-equity swaps (DES) to cut the country’s debt mountain, allowing banks to hold equity stakes in state-owned enterprises, the guidelines of which were clarified in October.
In November, the State Council, China’s cabinet, rolled out additional contingency measures on local government debt risk, which specified different levels of risk and what contingency plans should be in put in place for each.
According to the blueprint, high-debt-risk regions with interest payments above 10 per cent of budget spending should launch fiscal restructuring programmes, including the disposal of government assets and strengthening audit and fiscal management.
“We agree with what’s been decided on this issue,” said Lee.
“In our view, debt-repayment supervision has been tightened with local officials being held accountable for controlling financial risks in their own jurisdictions,” he said.
“Local government liquidity and access to funding has also been bolstered by the local government debt swap programme.”
More than 250 investors, intermediaries, and offshore participants were polled as part of S&P Global Ratings’ annual “China Credit Spotlight” seminar series, held recently in Singapore, Hong Kong, Beijing, and Shanghai.
The results suggested that those in Hong Kong and Singapore tended to be slightly more pessimistic on China’s debt situation.
Asked about the increased weighting of government and the quasi-public sector in the credit mix, more than 70 per cent of participants based in the mainland viewed this as marginally positive.
Hong Kong and Singapore participants were slightly more cautious, however, with only 54 per cent and 59 per cent, respectively, sharing the view.
The majority of investors in all locations do not expect that bond defaults for local government financing vehicles (LGFVs) will become material.
In a separate research report, JP Morgan analysts warned that the debt-to-equity swap programme, which helps reduce companies’ debt loads by allowing banks to swap bad loans for equity in the companies they lend to, might not help tackle the country’s debt problem.
In the near term the measure is likely to reduce credit risks, but it could ultimately increase contagion risks in China’s banking system.
“DES help to lower leverage for borrowers and enable banks to move potential ‘problematic loans’ off balance sheet, leading to lower non-performing loan recognition,” said analysts from the investment bank.
“DES increase contagion risks among banks as they encourage banks to cross-hold potential problematic loans through DES programmes. The long-term impacts of such measures could be negative.”