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China economy

PBOC adviser warns against rapid deterioration of corporate debt quality

Ma Jun, chairman and president of the Hong Kong Green Finance Association, says there is now a growing need for Beijing to think of ways of preventing risk from accelerating too quickly

PUBLISHED : Monday, 03 September, 2018, 6:48pm
UPDATED : Monday, 03 September, 2018, 6:48pm

A senior adviser to the Chinese central bank has warned that private corporate debt should not be allowed to expand too rapidly, as the government steps up its efforts to prop up the economy amid an escalation in trade tensions with the US.

The Chinese authorities have in recent months eased monetary policy conditions and allowed the national currency, the yuan, to weaken to support more private corporate lending to kick-start growth, promoting domestic infrastructure investment particularly.

But uncertainty remains over the effectiveness of the policies, which are largely being made to counter the looming tariffs set to be placed on US$200 billion worth of Chinese exports.

The US and China have been taking tit-for-tat shots at each other’s exports, worth a combined US$16 billion last month, following US$34 billion worth in July.

But Ma Jun, a policy adviser to the People’s Bank of China, told a news conference on Monday for the pre-launch of the Hong Kong Green Finance Association – being inaugurated on September 21 of which he is chairman and president – that Chinese corporate bonds especially are falling under increasing risk, mainly from the relatively fast pace of rising credit, and there is now a growing need for the government to think of ways of preventing risk from accelerating too quickly.

I am now proposing that [reserve ratio requirement] cuts be targeted in the next round at green companies and green projects as part of the government’s support objectives
Ma Jun, policy adviser to the People’s Bank of Chin, chairman and president of the soon-to-launch Hong Kong Green Finance Association

“Guarantees and other similar measures should be extended to private companies,” he urged.

Ma’s association is a non-profit organisation with the raison d’être of mobilising private-sector resources to assist the government in developing green finance policies and promote the adoption of best practices, including green credit, green bonds, green insurance and environmental, social and corporate governance.

Analysts and market watchers say the volume and pace of Beijing’s policies so far have been partly restrictive because of China’s other priority of slashing debt across its finance sector, and controlling overcapacity in inefficient industries.

Low-hanging fruit and a mountain of debt – how China’s credit binge is playing out

With China’s economy still being driven almost entirely by credit creation and rising offshore US dollar funding costs, Chinese companies are likely to feel the pressure, said Steen Jakobsen, chief economist and CIO at Saxo Markets.

A report by the IMF in June added that state-owned enterprises (SOEs) continue to be less profitable and carry more debt than private firms even though SOE’s share of loss making had declined to 24 per cent from 28 per cent in 2015.

The study also said China’s economy is still being driven almost entirely by credit creation and rising offshore US dollar funding costs.

A fresh independent survey released on Monday, meanwhile, reveals the nation’s manufacturing activity grew at the slowest pace in more than a year in August.

The much-watched Caixin/Markit Purchasing Manager’s Index (PMI) dropping to 50.6 in August, the weakest reading since June 2017 down from 50.8 in July, pointing to likely further economic cooling in coming months.

“China’s previous reserve ratio requirement (RRR) cuts were targeted at lending to small businesses and the agricultural sector,” Ma said.

Will China’s debt woes develop into a full-blown banking crisis?

“I am now proposing that cuts be targeted in the next round of RRR at green companies and green projects as part of the government’s support objectives.”

Guota Junan Securities analyst Qin Han said inflation fears were recently triggered too by higher pork and vegetables prices and those in turn are expected to keep the authorities on their toes over the scale and speed of stimulus policies.

Han expects inflation to rise to 2.5 per cent in the fourth quarter and face further upwards pressure next year.

Ma noted there had been a decline in green bond issuance in the early part of this year, again because of Beijing’s efforts to cut debt, adding he has proposed a couple of ideas to the regulators aimed at ensuring that funding for the sector will continue.

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