New signs show that China is cracking down on debt again

A woman walks past the People’s Bank of China headquarters in Beijing, China.

Jason Lee | Reuters

BEIJING – Data so far for the year shows signs that China is starting to deleverage.

A first-quarter survey by the China Beige Book published Thursday found that state-owned corporate borrowing has dropped to its lowest level in the study’s roughly 10-year history. Total debt fell to its lowest level in three years, while that of large corporations hit a five-year low, the report said.

Given the ties with the state, the government-affiliated companies are the “best signal” of the authorities’ political intent, Shehzad Qazi, executive director of China Beige Book, said in a note. The company conducts quarterly surveys of companies in China.

Economists note that China’s relatively low GDP target of over 6% this year allows policy makers to address issues like high debt without worrying about growth. Before the coronavirus pandemic last year, China tried to contain this debt growth with mixed results.

While Qazi noted that more quarterly data will be needed to determine if China has fully moved back into “debt relief mode”, there are other signs that the authorities are trying to control the debt.

According to a report by Allianz on Monday, citing the analysis of its subsidiary Euler Hermes, China’s debt ratio rose from an average of 251% between 2016 and 2019 to 285% at the end of the third quarter of 2020.

Although that debt ratio has not fallen, it has stabilized, senior economist Francoise Huang said in a telephone interview on Tuesday. “Stabilization is already a good sign and is likely one of the targets of Chinese policymakers’ debt relief campaign.”

She pointed out that a nationwide measure of debt called total funding has slowed growth since October.

On an annual basis, total financing for the real economy rose 44.39% year-on-year in October, but has since declined, according to Wind Information. The number showed a 16.19% increase in February.

Chinese regulators have warned of financial risks in the past few weeks, particularly in stocks and the real estate market. Premier Li Keqiang said in an annual report on the economy earlier this month that China has sufficiently recovered from the coronavirus pandemic and that no bond issuance is planned.

One concern of this support withdrawal is that banks may no longer be as keen to lend to smaller, privately owned companies as they were during the pandemic, when Beijing specifically encouraged those loans. China’s big banks are state-owned and prefer to work with state-owned companies rather than riskier privately owned companies. However, the private sector contributes to the majority of jobs and growth in China.

“I think policymakers want private and especially small and medium-sized enterprises not to be affected by this deleveraging,” said Huang. “But in the end I think it could be something that affects all types of businesses.”

Bank loan for CO2 emission targets

Moody’s expects credit growth “will be more modest this year,” especially with new restrictions on lending in real estate-related industries, said Nicholas Zhu, vice president and senior credit officer at Moody’s Investor Service.

He added that China’s emphasis on the highest carbon emissions in 2030 will generate greater business demand for funding for renewable energy-related projects. Because of the experience of Chinese solar companies, many of which have gone bankrupt, banks will be more cautious about lending.

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