Cutting corporate debt will drag China’s economic growth down to 4.5 per cent, says Fitch

Beijing’s campaign to tackle the scourge of corporate debt will reduce China’s economic growth by more than one percentage point annually in the medium term, according to Fitch Ratings.

The global ratings agency said measures taken by the government to bring down borrowing levels will inevitably dent business investment and take annual GDP growth down to about 4.5 per cent, well below the official target of 6.5 per cent.

“China’s corporate debt challenges remain a key downside risk to medium-term growth...investment needs to slow sharply to reduce corporate borrowing,” said Brian Coulton, chief economist at Fitch, in a report published on Sunday.

“Such an adjustment would take a big toll on GDP growth, given that business investment is equal to a quarter of GDP.

“The scenario analysis we have undertaken suggests that, when it (deleveraging of the real economy) does occur, it will be a process that will be a significant drag on growth.”

China’s policymakers have been aggressive in their drive to reduce the corporate debt mountain, intensifying their efforts this year and pressing regulators hard to implement measures to curb borrowing.

But as credit growth and infrastructure investment have started to fall sharply, “cracks have appeared” in the real economy and a rise in defaults has tested the nerves of investors, said Larry Hu, head of China economics at Macquarie Securities in Hong Kong.

Outstanding off-balance sheet lending plunged by 100 billion yuan in the first four months of 2018, having grown by 2.2 trillion yuan in the same period last year.

“Of course Beijing could turn to easing or introduce measures to offset the impact of credit tightening, but so far it seems they are comfortable to tolerate the jitters caused by deleveraging, as long as the fundamentals of the economy remain okay,” Hu said.

There have been more than two dozen bond defaults in China’s onshore market this year, mainly by private firms.

In the offshore market, China Energy Reserve & Chemicals Group and CEFC Shanghai International Group defaulted on dollar notes in May.

There is no official data to quantify corporate debt but many independent estimates put the figure at roughly 160 per cent of national gross domestic product. A Reuters survey recently suggested the total debt – including borrowing via loans and bonds – amounted to 13.2 trillion yuan (US$2.1 trillion) at the end of March.

Instead of easing monetary conditions, Beijing has been fine-tuning measures to manage the balance between cutting debts and maintaining overall economic stability.

The People’s Bank of China (PBOC), the country’s central bank, on Friday broadened the range of collateral it accepts in its medium-term lending operations, adding debt instruments tied to small-business funding and the green economy, to enhance support for smaller businesses.

In April, it cut the reserve requirement ratio by one percentage point to give lenders more liquidity.

A Reuters analysis last week showed that debt growth for Chinese companies has slowed to the lowest rate in more than a decade, but companies have also seen their profit margins squeezed to their lowest level in two years.

China’s economic expansion is likely to slow to 6.6 per cent this year and to about 5.5 per cent by 2023, the International Monetary Fund (IMF) said in a statement issued last week in Beijing.