by Frank Tang in South China Morning Post, July 11, 2017
China’s leadership headed by President Xi Jinping is still facing “significant obstacles” in reining in credit growth and reducing financial risks, the government’s top economic priority, according to a report by the ratings agency Standard & Poor’s. where Xi and other leaders are expected to discuss how to prevent any form of financial crisis hitting the world’s second largest economy.
Standard & Poor’s said Beijing was trying hard to “deleverage”, but the government’s intention to maintain relatively fast economic expansion, as well as the existence of the large state-owned sector, would continue to lead to fast credit expansion. China’s local governments were also demanding more credit, too, the report said.
“The obstacles to bringing down financial risks in the country remain significant. Whether the Chinese government can stabilise overall financial risks is still uncertain,” analysts Kim Eng Tan and Qiang Liao wrote in the report.
Standard & Poor’s has not changed its sovereign rating for China, but it kept a “negative” outlook on China’s credit worthiness.
Chinese leaders have turned their attention to financial stability this year as corporate debt has risen to a new high after years of stimulus , plus risks buried deep in financial institutions which have increasingly expanded the scope of their businesses into securities, insurance, banking and internet finance.
This has been accompanied by a shift in monetary policy and greater oversight from the central bank, plus joint regulatory coordination from the country’s three financial regulators to crack down on market irregularities.
The report said, however, that policymakers’ could lower oversight on debt and credit if economic growth was significantly impaired.
“If, for any reason, China’s economic growth threatens to come in significantly below target, it is possible that policymakers will ease credit constraints significantly again,” the report said.
China’s economy grew 6.9 per cent in the first quarter, compared to the full-year target of 6.5 per cent, but a variety of signs suggest it will gradually slow towards the end of the year.
China’s central bank did not follow the US Federal Reserve’s interest rate rise last month, a sign that its policy is still weighted towards promoting economic growth.
Local governments’ and state owned enterprises’ addiction to credit could also undermine government plans to rein in debt, the rating agency said.
Local government officials used to rely on economic growth for promotion, but their hands were largely tied by the central government order of debt caps and reorganisation of local financing vehicles. Their incentive for credit-fuelled economic growth, according to S&P, was to prevent “a rise in non-performing loans in their jurisdiction”.
State owned firms, which shoulder about 70 per cent corporate debt, still enjoy implicit state support, which allows them to get more funding from lenders. This, however, can squeeze private borrowers, the most vigorous part of the Chinese economy.
Corporate debt reached US$17.8 trillion by the end of 2016, or 166 per cent of China’s gross domestic product, according to the Bank for International Settlements.http://www.scmp.com/news/china/article/2102111/xis-top-economic-job-faces-significant-obstacles-sp-says
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