China's Zhou warns corporate debt too high, urges fiscal reform

[NEW YORK] People's Bank of China Governor Zhou Xiaochuan warned that Chinese companies have taken on too much debt, and argued for less financial leverage as well as fiscal reforms to constrain local government borrowing.

"The main problem is that the corporate debt is too high," Mr Zhou said Sunday during a panel discussion at a Group of 30 seminar in Washington held in conjunction with the International Monetary Fund and World Bank annual meetings.  While debt servicing costs remain low, "we need to pay further effort to deleveraging and strengthen policy for financial stability," Mr Zhou said. 

He appeared alongside policy makers including Federal Reserve Chair Janet Yellen and Bank of Japan Governor Haruhiko Kuroda.

China's surging corporate debt is a concern for global policy makers and investors alike.

While the IMF upgraded China's growth forecasts this week, it warned that the economic expansion comes at the cost of a further increase in debt which may mask risks.

Fed Governor Jerome Powell singled out China as the poster child for heavily-indebted corporate sectors in emerging markets, saying "risks are significant and bear close watching.''

In his presentation, Mr Zhou said China's overall debt level, including corporate, government and household, started to decline this year after policy makers' efforts to rein in leverage. "Although it's a very moderate decline, anyway, the trend has been changed," he said.

Mr Zhou said some of China's corporate debt includes borrowing from financing vehicles owned by local governments. When that debt is re-defined, corporate borrowing is estimated at 120 per cent to 130 per cent of gross domestic product, instead of the official figure of 160 per cent of GDP. Government debt would be about 70 per cent instead of 36 per cent, he said.

While it's a more balanced debt structure than commonly perceived, "it's still important to look at the local government behavior," Mr Zhou added.

Complicated relationships among provincial, municipal, and more than 3,000 county governments creates an opaque system and intensify price distortions for loans and debt borrowed by local governments, he said.

"There is a problem that the fiscal policy transparency may not be good enough," said Mr Zhou, 69, who's lead the PBOC since 2002. "The inter-government relationship has lots of problems. There's no very clear fiscal discipline to constrain those local governments. In the financial markets, there's distortion." Mr Zhou said the government will "gradually" tackle these problems, and "sooner or later, the central government must pay more attention on fiscal reform."

OPENING UP

Mr Zhou's remarks were the latest in a string of public comments by China's normally low-profile central bank chief. Before heading for Washington, he used an interview with the Beijing-based financial magazine Caijing to make a fresh call to further open up the financial sector.

During Sunday's the panel discussion, Mr Zhou said the government's efforts to cut overcapacity in the steel and cement industries have proven better than expected and may reach a target of reducing capacity by 10 per cent. Economic growth may reach 7 per cent this year, which would be the fastest expansion since 2014, he said.

Turning to financial stability, Mr Zhou said shadow banking activities have slowed in response to policy makers' campaign to reduce financial risk taking.

Still, other vulnerabilities exist. He called the asset management business "a relatively chaotic situation" because the three regulators overseeing the industry set different rules.

Internet firms without financial licenses may "cause certain competition and financial stability problems," he said.

In addition, there's inadequate policies to regulate cross-sector transactions from financial holding companies, and there may be some illegal operations in terms of capital financing.

Mr Zhou had earlier released a statement during the IMF meetings that said a campaign to rein in leverage are is showing results, and that China will monitor and prevent shadow banking and real estate risk.

BLOOMBERG