China continues its love affair with credit
Debt levels continue rising, and it appears the PBOC is happy to let them
The Chinese government has reiterated it will stick to its rebalancing effort to divert the economy away from a credit-reliant development model.
But increasing amounts of data is pointing towards the world’s second largest economy still being heavily reliant on credit to support its growth target, and that reliance could grow even bigger.
The Bank of International Settlement (BIS), the clearing house of central banks in Basel, has just issued a fresh alert on the country’s fast growing credit.
According to the BIS, China’s credit-to-GDP gap, which measures credit growth above a country’s long-run trend and is viewed as an early warning of financial overheating, is now 30.1 per cent, around three times what it considers as a danger level. Usually, anything above 10 per cent is considered a red flag.
The indicator for China is the highest among the countries assessed by the banking industry’s global watchdog, way above the second highest level of 12.1 per cent for Canada.
Huang Yiping, an advisor to China’s own central bank, the People’s Bank of China, says that it hasn’t made substantive progress in reducing leverage and the efficiency of China’s investment has been declining.
According to a recent report from the Fitch Ratings, the adjusted ratio of China’s total social financing to its GDP reached 243 per cent at the end of 2015, almost double the figure in 2008.
Total social financing is a broader measure of credit in the economy, including bank loans, bond financing and stock fund-raising,
That ratio will rise even further to 253 per cent by the end of 2016 and 261 per cent by the end of 2017 and hit 269 per cent by the end of 2018, said the ratings agency.
That coincides with an earlier report from Goldman Sachs, which says China’s reliance on credit has deepened significantly, as its credit-to-GDP ratio approaching 270 per cent, compared to 150 per cent in 2008.
China’s credit growth has remained high this year, with the total social financing growing by 12.3 per cent compared to one year earlier.
The growth in outstanding bank loans in yuan rose to 13 per cent year on year in August. New loans extended in the month increased 948.7 billion yuan, significantly higher than 463.6 billion yuan the previous month.
Also notably, China’s local government bond issuance reached 4.8 trillion yuan in the first eight months of this year, already higher than last year’s total amount of 3.8 trillion yuan.
If China’s credit expansion continues to outstrip its GDP growth, the risk of deterioration in the banking system’s asset quality and liquidity will grow, said Fitch Ratings in its report.
The ratings agency has noted that more than half the increase in credit since 2008 is at risk of being inefficient, which puts growing pressure on the country’s non-performing loan.
Government statistics show Chinese banks’ NPL ratio is close to 2 per cent, the highest in 11 years.
However, that’s still widely considered as an underestimate of the country’s bad loan problem.
Qin Xiao, the former head of China Merchants Bank, said recently that China’s ratio could be up to 6.41-7.91 per cent, if potential NPLs in both banking and shadow banking system are included.
Fitch believes China’s bad loan problem is much worse than that, with its NPL ratio at around 15 per cent to 21 per cent at the end of 2015.
Huang Yiping said the real estate and mining sectors are showing the highest leverage in China.
So far this year, a larger share of new credit is now going to the household sector, especially in the form of mortgage lending. From January to August, mortgages accounted for around 46 per cent of total new loans, up from 33 per cent for the whole of 2015.
Lending to households boosts real estate prices, and corporates then use inflated property prices to secure borrowing of their own, adding to leverage in the economy, said Fitch.
The authorities’ commitment to meeting GDP growth targets leads Fitch to believe credit expansion is likely to play a central role in supporting the economy for several more years, and will lead to continued leveraging of the economy.