China economy

China’s campaign to cut debt enters new stage, says stock exchange official

IMF has warned that China’s debt levels pose a risk to Asia

PUBLISHED : Monday, 18 December, 2017, 2:22pm
UPDATED : Monday, 18 December, 2017, 10:30pm

China is in a new phase of its campaign to cut debt, focusing on rules to shrink a bloated financial sector that has grown rapidly as product innovation outpaced regulatory oversight, a senior researcher at the Shanghai Stock Exchange said.

The financial sector had threatened growth by crowding out resources in the real economy, while the ballooning shadow banking business had boosted money supply and created expectations of asset price inflation, Shi Donghui, the director of the exchange’s Capital Market Institute, said.

Fresh warnings to debt-ridden China of living on borrowed time

“China’s bloated financial sector … has siphoned talent and other resources from the real economy, and has reached a tipping point at which it starts to slow, rather than stimulate growth,” Shi told a financial sector conference in Shanghai on Sunday. “Having stabilised debt growth on a macro level, the focus of the next phase is to toughen supervision over leverage on a micro level.”

China has proposed new rules to better regulate its asset management industry, the key contributor to the shadow banking expansion. It is also tightening banks’ liquidity management and cracking down on microlending and low-rated insurers.

The International Monetary Fund has warned that China’s excessive debt levels pose a risk to Asia. China’s central bank says the country’s overall gearing ratio stood at 247 per cent at the end of 2016, with a corporate gearing ratio of 165 per cent, exceeding an internationally recognised red line.

Shi said China’s high gearing was the result of previously loose monetary and fiscal policies aimed at stemming a slide in economic growth in the aftermath of the 2008-09 global financial crisis, but the side-effects were starting to work against government goals.

A slow and bumpy ride ahead for China’s economy amid mounting debt and the end of cheap funds

But instead of sharply slashing gearing, which would have dealt a hard blow to the economy, China used “financial engineering” to move liabilities among various entities to buy time, Shi said.

For example, through public-private partnership schemes, China moved local government debt to the private sector; through property destocking, corporate debt was partly turned into residential debt; and through supply-side reforms, liabilities in upstream industries were partially shifted to mid-stream sectors.

“China has stabilised overall debt levels,” Shi said. “And now, we have time to reduce leverage.”