China’s ‘significant obstacles’ in its battle against financial risks

Chinese President Xi Jinping’s administration is still facing ­“significant obstacles” in reining in credit growth and reducing financial risks, Standard & Poor’s has said, underscoring the ­challenges brought by competing policy goals as well as the differing priorities set by the central and ­local governments.

The note of scepticism came days ahead of an important financial work conference where Xi and other leaders are expected to discuss how to prevent any financial crisis from hitting the world’s ­second largest economy.

Standard & Poor’s said in its report on Monday Beijing was trying hard to “deleverage”, but the government’s goal of maintaining relatively fast growth, as well as the large state-owned sector, would continue to lead to credit expansion. Local governments were also demanding more credit, the report said.

“The obstacles to bringing down financial risks in the ­country remain significant. Whether the Chinese government can stabilise overall financial risks is still uncertain,” analysts Kim Eng Tan and Qiang Liao wrote in the report.

Standard & Poor’s has not changed its sovereign rating for China, but it kept a “negative” outlook on its credit worthiness.

In a rare repeated call in April, Xi told the Communist Party’s Politburo that the nation faced challenges in overhauling its economy but authorities should ensure there were no systemic financial risks. That followed a financial work meeting in March where Xi called for additional ­controls against financial risks.

“China’s hunger for credit can’t be eased in the short term since it is a natural choice for business entities to increase debt, rather than dispose of assets,” Zhou Hao, chief emerging market economist at Commerzbank in Singapore, said. Authorities had realised deleveraging would take time, he said.