China signals easing of deleveraging stance on big state firms

Beijing

CHINA said it will focus on maintaining debt levels at the largest state-run firms rather than deleveraging, which may reassure investors after a wave of defaults at smaller firms.

State-owned enterprises' (SOE) credit ratings are at a good level and their bond size is generally reasonable, Peng Huagang, spokesperson of the state-owned Assets Supervision and Administration Commission (Sasac), said at a briefing on Tuesday. Sasac is responsible for managing SOEs.

The comments suggest Beijing will avoid resurrecting a campaign to significantly reduce debt amid an uneven economic recovery from the coronavirus pandemic. Leverage in the economy surged to a record 277 per cent of total output in August.

"Today's Sasac guidance should shore up confidence that the authorities will deftly manage leverage risks in response to market conditions, so as to keep the refinancing channel open and contain default risks onshore," according to Chang Wei Liang, a macro strategist at DBS Bank in Singapore.

Thanks to its domestic success in reining in the virus, Beijing has bucked the global trend of greater economic stimulus since last year and instead chosen to resume its long-term battle on debt. Policy makers have allowed for tighter liquidity in the financial system and tolerated a surge in bond failures by state-linked firms in recent months.

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However, the latest rhetoric from the state asset regulator suggests the authorities are growing wary of going too hard on a deleveraging campaign that has swayed in magnitude in recent years as policy priorities shifted.

"Against the backdrop of high leverage, any abrupt policy change or rapid deleveraging may lead to a lot of problems," said Ming Ming, head of fixed-income research at Citic Securities. "Looks like regulators are hoping to use quality economic growth to gradually reduce leverage." BLOOMBERG