China’s corporate borrowing binge set to slow in next 5 years: S&P Global Ratings
Policymakers in Beijing are using all possible tools to reduce the country’s dependence on debt, and they have made a tentative but uneven start
China has taken baby steps towards deleveraging and is running an unconventional monetary policy, with the current corporate borrowing boom expected to slow over the next five years, S&P Global Ratings said on Tuesday.
China has made a “tentative but uneven” start to reduce the level of debt in its economy, Christopher Lee, Qiang Liao, and Kim Eng Tan, analysts for S&P Global Ratings, said in a report.
“Over the next five years, we expect China’s corporate borrowing binge to slow, due to improving profitability and tighter discipline on investment spending.”
Policymakers have attempted to channel funding into sectors with less overcapacity and greater growth potential, while also trying to reduce the strain on corporate balance sheets through debt-for-equity swaps, merger and acquisitions, or supply-side reform measures that could boost profitability, the analysts said.
Debt-for-equity swaps allow a company’s creditors to exchange the debt for equity in the company.
To lower China’s dependence on credit, policymakers are also running an unconventional monetary policy.
Earlier this year, Sheng Songcheng, an official at the People’s Bank of China, said the central bank’s monetary policy will remain neutral for this year, with a tightening bias.
The analysts said that for the first time since 2012, banks’ asset growth has trailed nominal GDP, a sign that policy mindset has shifted to ‘tight/neutral’.
Still, authorities continue to selectively route funds to favoured sectors, including government-backed infrastructure investment.
“The trick for policymakers is to figure out a way to reduce the country’s dependence on debt, without causing a hard landing or financial crisis,” Lee said.
Additionally, the analysts expect household debt to rise much faster in the next few years, even though real estate is already “very expensive” in China.
“China’s urbanisation trend still has a long way to go, and this remains a structural driver for housing demand.”
Nonetheless, passing the baton of credit-fuelled growth to households also has many risks.
“If the property market corrects sharply, the ensuing stress would be negative for consumption, banks’ assets quality, and local-government fiscal budgets,” they said.