China’s ‘significant obstacles’ in its battle against financial risks
Chinese President Xi Jinping’s administration is still facing “significant obstacles” in reining in credit growth and reducing financial risks, Standard & Poor’s has said, underscoring the challenges brought by competing policy goals as well as the differing priorities set by the central and local governments.
The note of scepticism came days ahead of an important financial work conference where Xi and other leaders are expected to discuss how to prevent any financial crisis from hitting the world’s second largest economy.
Standard & Poor’s said in its report on Monday Beijing was trying hard to “deleverage”, but the government’s goal of maintaining relatively fast growth, as well as the large state-owned sector, would continue to lead to credit expansion. Local governments were also demanding more credit, the report said.
“The obstacles to bringing down financial risks in the country remain significant. Whether the Chinese government can stabilise overall financial risks is still uncertain,” analysts Kim Eng Tan and Qiang Liao wrote in the report.
Standard & Poor’s has not changed its sovereign rating for China, but it kept a “negative” outlook on its credit worthiness.
In a rare repeated call in April, Xi told the Communist Party’s Politburo that the nation faced challenges in overhauling its economy but authorities should ensure there were no systemic financial risks. That followed a financial work meeting in March where Xi called for additional controls against financial risks.
“China’s hunger for credit can’t be eased in the short term since it is a natural choice for business entities to increase debt, rather than dispose of assets,” Zhou Hao, chief emerging market economist at Commerzbank in Singapore, said. Authorities had realised deleveraging would take time, he said.
Raymond Yeung, ANZ’s chief economist for Greater China, said the nation “still relies on credit expansion” to achieve its policy goals tied to the “Belt and Road Initiative” and urbanisation.
“Government planning still exists in the banking and economic system, as shown in growth targets of gross domestic product, M2 and aggregate financing,” he said, referring to a measure of the money supply.
Leaders have turned their attention to financial stability this year as corporate debt has risen to a new high after years of stimulus growth, while risks buried deep in financial institutions have increasingly expanded the scope of their businesses into securities, insurance, banking and internet finance.
This has been accompanied by a shift in monetary policy and greater oversight from the central bank, plus joint regulatory coordination from the country’s three financial regulators to crack down on market irregularities.
“If, for any reason, China’s economic growth threatens to come in significantly below target, it is possible that policymakers will ease credit constraints significantly again,” Standard & Poor’s said in its report.
China’s economy grew 6.9 per cent in the first quarter, compared to the full-year target of 6.5 per cent, but a variety of signs suggest it will gradually slow towards the end of the year.
China’s central bank did not follow the US Federal Reserve’s interest rate rise last month, a sign that its policy is still weighted towards promoting economic growth.
Local governments’ and state owned enterprises’ addiction to credit could also undermine government plans to rein in debt, the rating agency said.
Local government officials used to rely on economic growth for promotion, but their hands were largely tied by the central government order of debt caps and reorganisation of local financing vehicles. Their incentive for credit-fuelled economic growth, according to S&P, was to prevent “a rise in non-performing loans in their jurisdiction”.
State owned firms, which shoulder about 70 per cent corporate debt, still enjoy implicit state support, which allows them to get more funding from lenders. This, however, can squeeze private borrowers, the most vigorous part of the Chinese economy.
Corporate debt reached US$17.8 trillion by the end of 2016, or 166 per cent of China’s gross domestic product, according to the Bank for International Settlements.