China's massive debt pile to stabilise, economists predict
China’s massive debt pile may finally stabilise this year as President Xi Jinping prioritises control of financial risks, according to economists.
Total debt will be 260 per cent of gross domestic product at the end of 2018, the same as it was 12 months earlier, according to the median estimates of 21 economists surveyed by Bloomberg in March. In nominal terms, that would mean the growth in debt is slowing to roughly the same pace as the economy.
China is one of the countries most at risk of facing a banking crisis, the Bank for International Settlements warned recently, and Xi’s newly appointed top economic officials aim to prevent such an outcome. Stricter regulations, curbs on lending between financial institutions and a gradual increase in borrowing costs over the past year have all contributed to the deceleration of credit growth and that campaign has now expanded beyond the financial sector.
“The deleveraging campaign will be comprehensive this year – local governments, state-owned firms, households. There is no escape,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong. Shen projects that the debt ratio peaked last year and will decline because of the government’s actions and robust corporate earnings.
While China has not published any official data on the size of its outstanding debt, the analysts surveyed estimated it at between 200 per cent and 283 per cent of GDP at the end of last year. Bloomberg Economics estimated it at 266 per cent.
The nation reined in interbank lending last year and the growth of M2 broad money supply slowed last December to a record low in data going back to 1996. Guo Shuqing, who led the de-risking campaign in the financial sector as the top banking regulator, was appointed to a top role at the central bank last month.
Former central bank governor Zhou Xiaochuan – who retired last month – told a press conference during the National People’s Congress in Beijing in March that China has entered a phase of stabilising and gradually reducing leverage.
The debt curbs are now expanding to target the broader economy. Local governments and enterprises, especially state-owned firms, should speed up the pace of leverage reduction, according to a state-run Xinhua news agency report on the first meeting of the new Central Committee for financial and economic affairs, which is chaired by Xi.
The People’s Bank of China vowed to “effectively control the macro leverage ratio and credit risks in key areas” at a meeting chaired by Guo on Tuesday, according to a statement posted to the bank’s website Wednesday.
The broader crackdown will curb debt-fuelled investment growth in areas such as housing construction, bridges, tunnels and other infrastructure. Fixed asset investments in all three major categories – real estate development, infrastructure and manufacturing – are forecast to decelerate, according to the economists surveyed.
Raymond Yeung, chief Greater China economist for Australia & New Zealand Banking Group in Hong Kong, sees the debt ratio edging down this year and reaching a steady state within three years. “Much of the credit in the past has flowed into the unproductive sector,” Yeung said. “Therefore, the negative impact of growth due to this deleveraging should be small.”
Still, even a slower pace of debt growth may fail to limit risks in some areas. Leverage is falling at a faster pace among stronger borrowers and more slowly among those that are less efficient – such as utilities, real estate, materials and energy, Bloomberg China economist Qian Wan wrote in a recent note.
Some economists believe the expansion of the pile has yet to be contained. “China’s debts expanded very rapidly in the past and more time is needed for the stockpile to decelerate or decline,” said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria in Hong Kong. He projects the ratio to jump to 270 per cent this year from 260 per cent and rise to between 280 and 290 per cent before stabilising around 2020.
“Bankruptcy is the real effective method to crack down on debts,” Xia said. “When Chinese society gradually learns to accept defaults and bankruptcies, the credit growth will slow down for real.”