China’s debt reduction drive becomes trade war casualty as Beijing unleashes bank lending
- A record US$477 billion in new loans were granted in January, while total social financing also reached a record US$685 billion last month
- Beijing encourages banks to issue perpetual bonds to boost their lending capacity as President Xi Jinping’s deleveraging campaign is put on hold
China’s government is allowing the nation’s overall debt level to grow again as it engages in an aggressive campaign to boost new lending to prevent an economic meltdown amid the trade war with the United States.
The change in tactic brushes aside, at least in part, the deleveraging campaign that was one of the economic policy priorities set out by President Xi Jinping over the last three and half years.
While Beijing insists it will not embrace massive policy easing to avoid a repeat of the sharp build-up in debt seen after the global financial crisis a decade ago, it is clear that the debt reduction drive has come to an end, at least for now.
Banks granted 3.23 trillion yuan (US$477 billion) in new loans in January, while total social financing, which includes bank loans, bond and other financing vehicles, reached a record 4.64 trillion yuan (US$685 billion) last month, an amount equal to 5 per cent of China’s gross domestic output last year.
China’s economic policymakers are explicitly encouraging additional debt accumulation with local governments allowed to sell more bonds to finance newly approved infrastructure projects, with the bonds front-loaded to get the money to work sooner.
In addition, the People’s Bank of China (PBOC) is helping banks to sell perpetual bonds – bonds with no set maturity – so that lenders can boost their capital levels and lending capacity.
