Beijing’s fear of financial crisis ‘drives crackdown on big borrowers’

PUBLISHED : Monday, 14 August, 2017, 7:21pm
UPDATED : Monday, 14 August, 2017, 11:15pm

Beijing’s fear of a massive financial crisis is driving its sweeping crackdown on big borrowers such as conglomerates Dalian Wanda and LeEco, according to an opinion piece in Communist Party mouthpiece People’s Daily on Monday.

Shedding light on the forces behind the crackdown, the commentary said the authorities wanted to avoid a repeat of the financial meltdowns in Japan in the 1990s, the United States in 2008 and the euro zone in 2010.

It said President Xi Jinping’s National Financial Work Conference last month was a watershed moment, after which “the days of high leverage and massive borrowing ... will be gone forever”.

Since July, Beijing has withdrawn its support for the offshore investment drives of the country’s major deal makers, including Wanda, HNA and Anbang Insurance.

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Each one of the groups had borrowed extensively to finance their aggressive business expansion and overseas acquisitions.

Wanda’s sudden sale of hotels and resorts was the beginning of the end of this era of “barbarous growth”, it said.

LeEco’s expansion also came in for heavy criticism. The company had once boasted of ambitions to create a tech empire to rival Apple, Tesla and Amazon, but the firm is now struggling under the weight of unpaid debts.

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The People’s Daily commentary said LeEco had spun stories to keep borrowing but its story “should have been ended earlier”.

Xi has made deleveraging one of his central goals for an economy that has amassed debts equivalent to about 300 per cent of the national gross domestic product.

But progress has been slow and risks continue to mount as well-connected private borrowers and state firms are kept afloat with cheap credit.

A report by the Chinese Academy of Social Sciences noted a dramatic rise in the leverage ratio for the corporate sector and local governments in the first three months of the year compared to 12 months earlier.

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The country’s leadership is showing a new resolve to tackle the debt mountain, saying too much leverage caused the crises in Japan, the US and the euro zone.

“Deleveraging, unlocking idle funds and curbing asset bubbles are important for not only reversing the fund flows towards the real economy and fixing imbalances in the economic structure, but also for preventing systemic financial risks. What’s more, it is the new normal that enterprises must face,” the commentary said.

Excessive expansion of the financial sector had squeezed out the real economy, inflated commodities prices, and led to an unsustainable leverage ratio, it said.

“Without the skin, how can the hair stand?” the commentary said, invoking a Chinese idiom to remind the financial sector to serve the real economy.