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China's corporate debt levels are excessively high: central bank

Friday, March 10, 2017 - 13:55

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Banks cannot support firms with high leverage, People's Bank of China Governor Zhou Xiaochuan told reporters at a news conference on the sidelines of the annual parliament session.

[BEIJING] China's corporate debt levels are excessively high, the head of its central bank said on Friday, as policymakers in the world's second-largest economy grow increasingly concerned about the risks from a rapid build-up in debt and an overheating housing market.

Banks cannot support firms with high leverage, People's Bank of China Governor Zhou Xiaochuan told reporters at a news conference on the sidelines of the annual parliament session.

But Mr Zhou stressed that China's efforts to cut debt levels will take time, describing it as a medium-term process.

Measures by local governments to cool rising house prices will cool mortgage demand to some degree, but housing loans will continue to grow at a relatively rapid pace, Mr Zhou said.

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China needs to first stabilise its overall debt levels and slow down the pace at which debt is rising, deputy central bank governor Yi Gang said at the same briefing.

The comments echoed those from top officials earlier in the parliamentary session about the need to contain credit risks in China after years of debt-fuelled expansion, which has been propelled by the need to meet official economic growth targets.

But, as with earlier pronouncements, there were few specifics for tackling the problems, and many veteran China watchers suspect authorities will quickly backpedal on reforms if there are signs that economic growth is faltering.

China's credit growth has been "very fast" by global standards, and without a comprehensive strategy to tackle the overhang, there is a growing risk it will have a banking crisis or sharply slower growth or both, the International Monetary Fund warned late last year.

Corporate debt has soared to 169 per cent of gross domestic product (GDP), according to figures from the Bank for International Settlements.

Even as policymakers warn of debt risks, heavy stimulus is still evident in record lending from mostly state-owned banks and increased government spending on infrastructure projects.

China's banks extended a record 12.65 trillion yuan (S$2.6 trillion) of new loans in 2016. Bank lending this January was the second highest on record and did not slow as much as expected in February.

China's debt to GDP ratio rose to 277 per cent at the end of 2016 from 254 per cent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a note.

In recent months, the PBOC has cautiously moved to a modest tightening bias in a bid to cool explosive growth in debt and discourage speculative activity, though it is treading cautiously to avoid hurting economic growth.

It surprised financial markets by raising short-term interest rates in January and February by marginal amounts, and is expected to bump them higher in coming months, though an increase in its benchmark policy lending rate is seen as unlikely this year.

Governor Mr Zhou said moving to a neutral policy stance would help with China's supply-side reforms, reiterating that it would be "prudent" while reminding markets that the central bank has many policy tools at its disposal.

China's definition of "supply-side reforms" is murky, but can include measures to discourage inefficient investment such as that that led to a massive overhang of excess industrial capacity after the global financial crisis.

The world's second-largest economy grew 6.7 per cent last year, roughly in the middle of the government's target range.

Beijing has set a more modest goal this year of 6.5 per cent, ostensibly to give policymakers more room to focus on financial risks.

But there is not enough evidence yet that the PBOC's moves to curtail riskier off-balance sheet lending are having any meaningful effect, economists at BofA Merrill Lynch Global Research said in a note on Thursday.

"In other words, the PBOC'S monetary tightening bias is only partially delivered so far," the note said. "The credit demand of various semi-sovereign entities, such as local government financing vehicles and state owned enterprises, are still inelastic to funding costs alone. "As a result, if the PBOC relies only on adjusting prices of credit to influence borrowing behaviours, but not the quantity, it will give rise to upside risks on growth and inflation."

Turning to the yuan currency, Mr Zhou repeated the standard party line that he expects the exchange rate to be stable this year, while conceding that some fluctuations are normal.

Despite repeated interventions by authorities last year, the yuan still fell 6.5 per cent against the US dollar.

It has steadied early this year as authorities moved to tighten controls on capital outflows and as the dollar's rally lost steam.

But it started to wilt again in recent sessions on growing expectations that the US central bank will raise interest rates as soon as next week, buoying the US dollar.

China burned through nearly US$320 billion of reserves last year to shore up the yuan and staunch capital outflows.

In January, reserves fell below the closely watched US$3 trillion level for the first time in nearly six years, but Mr Zhou told reporters that markets should not overreact to such falls.

Mr Zhou also said that China will not deliberately seek to have its bonds included in global indexes used by investors.

China has opened its bond markets to foreigners in recent months as it tries to boost investment inflows to counter capital flight.

REUTERS

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