Beijing ‘wants to deleverage, but not destabilise’
Nation ponders how to lower its debt mountain while being reluctant to give up debt-fuelled growth model
China is sending a confusing message that it wants to accelerate leverage reduction to tackle its debt mountain but is reluctant to give up its debt-fuelled growth model, economists warn.
Communist leaders have listed deleveraging as one of five key supply-side reform tasks, already releasing measures such as debt swaps, debt-to-equity and a neutral monetary policy with a tightening bias, but economic stabilisation seems certain to remain the top priority in this year of leadership reshuffles.
The world’s second-largest economy grew at a 26-year low rate of 6.7 per cent last year. After a strong economic performance at the start of this year, most financial institutions – from the International Monetary Fund to leading Chinese investment banks – have expressed optimism of obtaining the 2017 target of about 6.5 per cent growth with existing stabilisation measures.
“The stabilisation has been achieved by ‘releveraging’,” Fitch Ratings chief economist Brian Coulton said on the sidelines of the Boao Forum for Asia in Hainan on Friday. “There’s no deleveraging going on in China at the moment.”
The government’s leeway to maintain growth typically involves more lending to the state sector, which is the least productive and efficient in terms of the use of capital, Coulton said.
In line with economic stabilisation is strong credit growth and the return of heavy industries, despite the country’s pledges to combat pollution and overcapacity.
National new bank loans hit a historic high of 12.7 trillion yuan (HK$14.3 trillion) last year. The growth momentum continued into January, with 2 trillion yuan in loans extended, forcing the central bank to step in with new curbs.
China has the capability to tackle its debt problem since its overall level, despite rising to 261 per cent of GDP last year from 252 per cent in 2015, is not high by international standards. Its capital account surplus marks a major difference from crisis countries, and risk is largely contained in the broad state sector.
However, Coulton warned, it’s not a sustainable situation when the level of debt to GDP can continue to rise very rapidly year after year. “There’s a certain law of gravity here,” he said.
The heavily indebted corporate sector also remains an important challenge, although China has claimed some progress in lowering corporate leverage.
“Some local government financing vehicle debt was refinanced by municipal bonds and that distorted the headline figures,” Coulton said.
The country has identified nearly 15 trillion yuan of local government debt, with the aim to swap high-rate bank loans for lower rate bonds within three years, of which this is the final year.
Nicholas Lardy, a senior fellow of the Washington-based Peterson Institute for International Economics, indicated a divergence of leverage by tracking debt to equity ratios.
“If you disaggregate, [the debt to equity ratio of] state-owned companies is going up, but for private firms it is going down,” he said.
Private investment growth slowed to only 3.2 per cent last year, despite the government boosting its participation in infrastructure projects through public-private partnerships.
Lardy attributed that to the national economic slowdown since 2010, which is concentrated in the private-firm-dominated industrial and manufacturing sectors, and called for the opening up of service sectors.
“Many parts of the service sector are off limits to domestic private companies, or the access is very difficult,” he said.
Li Yang, a former deputy president of the Chinese Academy of Social Sciences, said that preventing releveraging of SOEs, which shoulder many social responsibilities and do not operate solely as businesses, is a prime task.
“A mechanism to eliminate SOEs’ incentive to increase their leverage is not yet in place. SOE reform will be the main topic, but it has not reached the expected progress,” he said.