What deleveraging? China sets sights on shoring up economy rather than hacking away at looming pile of debt

For almost two years, the question has lingered over China’s market-roiling crackdown on financial leverage: How much pain can the country’s policy makers stomach?

Evidence is mounting that their limit has been reached. From bank loans to trust-product issuance to margin-trading accounts at stock brokerages, leverage in China is rising nearly everywhere you look. While seasonal effects explain some of the gains, analysts say the trend has staying power as authorities shift their focus from containing the nation’s US$34 trillion debt pile to shoring up the weakest economic expansion since 2009.

“Deleveraging is dead,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong.

The question now is whether China’s attempt to create a healthier mix of financing – fewer shadow banks, longer debt maturities – will prove successful. Premier Li Keqiang underscored the challenge last week, warning of risks from sharp increases in short-term debt after China’s credit growth surged to a record in January.

“Chinese regulators are now trying to walk a fine line by allowing credit to flow back into the private sector without returning to the old pattern of rapid and unsustainable credit growth,” said Nicholas Borst, a China research director at Seafarer Capital Partners in Larkspur, California.