New signs show China is cracking down on debt again


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

Jason Lee | Reuters

BEIJING – Data for the year so far show signs that China is beginning to crack down on debt.

A first-quarter survey from the China Beige Book published on Thursday found that state-owned company loans fell to the lowest level in the roughly 10-year history of the study. Overall debt fell to its lowest level in three years, while that of large companies hit a five-year low, according to the report.

Given the ties to the state, government-linked companies are the “best sign” of the political intent of the authorities, China Beige Book managing director Shehzad Qazi said in a note. The company conducts quarterly surveys of companies in China.

Economists note that China’s relatively low GDP target of more than 6% this year gives policymakers the ability to tackle issues like high debt levels, without needing to worry too much about growth. Before the coronavirus pandemic last year, China had tried to curb debt growth with mixed results.

While Qazi noted that more quarterly data will be needed to say whether China has fully entered “deleveraging” mode again, there are other signs that the authorities are trying to control debt.

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

While that debt-to-GDP ratio hasn’t decreased, it has stabilized, senior economist Francoise Huang said in a telephone interview on Tuesday. “Stabilization is already a good sign and probably one of the objectives of the deleveraging campaign by Chinese politicians.”

He noted that a measure of nationwide debt called aggregate financing has slowed its growth since October.

So far this year, in year-on-year terms, aggregate financing to the real economy grew 44.39% in October, but has fallen since then, according to data from Wind Information. The figure showed an increase of 16.19% in February.

Chinese regulators have warned in recent weeks about financial risks, particularly in equities and the housing market. Prime Minister Li Keqiang said earlier this month in an annual report on the economy that China has recovered sufficiently from the coronavirus pandemic and no related bond issuance is planned.

One of the concerns of this pullback in support is that banks may not be as eager to lend to smaller private companies as they were during the pandemic, when Beijing specifically encouraged such lending. China’s major banks are state-owned and prefer to work with state-owned companies rather than riskier private companies. But the private sector contributes to the majority of jobs and growth in China.

“I think the legislators want the private and especially (small and medium-sized companies) not to worry about this deleveraging,” Huang said. “But I think that in the end it could be something that worries all kinds of companies.”

Bank loans for carbon emissions targets

Moody’s expects loan growth “to be more subdued this year,” especially as there are new restrictions on lending in real estate-related industries, said Nicholas Zhu, vice president and senior chief credit officer at Moody’s Investor Service.

He added that China’s emphasis on maximum carbon emissions in 2030 will generate more demand from companies to finance projects related to renewable energy. But he said banks will be more cautious about making loans due to past experience with Chinese solar companies, many of which went bankrupt.

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