A woman passes by 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 starting to crack down on debt.
A first-quarter survey by the China Beige Book, released on Thursday, found that loans by state-owned companies fell to the lowest level in the study’s nearly 10-year history. Overall indebtedness fell to the lowest level in three years, while that of large companies reached the lowest level in five years, the report said.
Because of ties to the state, companies linked to the government are the “best sign” about the authorities’ political intent, Shehzad Qazi, managing director of China Beige Book, said in a note. The company conducts quarterly business surveys in China.
Economists note that China’s relatively low GDP target of more than 6% this year gives policymakers the ability to solve problems such as high levels of indebtedness, without having to worry too much about growth. Before the coronavirus pandemic last year, China had tried to contain debt growth with mixed results.
While Qazi noted that more quarterly data will be needed to say whether China has fully gone into “deleveraging” mode again, there are other signs that officials are trying to control debt.
China’s debt-to-GDP ratio increased to 285% at the end of the third quarter of 2020, from an average of 251% between 2016 and 2019, according to a report by Allianz, citing analyzes from its subsidiary Euler Hermes.
Although the debt-to-GDP ratio has not declined, it has stabilized, senior economist Françoise Huang said in a telephone interview on Tuesday. “Stabilizing is already a good sign and probably one of the targets of the Chinese legislators’ deleveraging campaign.”
She pointed out that a national debt measure called aggregate financing has slowed its growth since October.
In the accumulated result for the year, year by year, the financing added to the real economy grew 44.39% in October, but has since declined, according to data from Wind Information. The figure showed an increase of 16.19% in February.
Chinese regulators have warned in recent weeks of financial risks, especially in stocks and in the housing market. Premier Li Keqiang said earlier this month in an annual report on the economy that China has recovered sufficiently from the coronavirus pandemic and that no related bond issue is planned.
One concern of this reduction 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 these loans. China’s main banks are state-owned and prefer to work with state-owned companies rather than higher-risk private companies. But the private sector contributes to most jobs and growth in China.
“I think lawmakers want private companies and especially (small and medium-sized companies) not to be concerned about this deleveraging,” said Huang. “But I think that in the end it could be something that concerns all types of companies.”
Bank loans for carbon emission targets
Moody’s expects loan growth “to be more moderate this year,” especially as there are new restrictions on lending in sectors related to the real estate sector, said Nicholas Zhu, vice president and chief credit officer at Moody’s Investor Service.
He added that China’s emphasis on the peak of 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 lending because of previous experience with Chinese solar companies, many of which have gone bankrupt.