People’s Bank of China Governor Zhou Xiaochuan (周小川) sounded a warning over rising debt levels, saying lending as a ratio to GDP — and especially corporate debt — had become too high.
China still has a problem with illegal fundraising and financial services are insufficient, Zhou said in a speech at the China Development Forum in Beijing yesterday.
“Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.
BALANCE
Chinese leaders are struggling to balance between meeting a target of at least 6.5 percent average annual growth to 2020, while addressing debt that has raced to almost 250 percent of GDP. In a briefing on Wednesday last week, Chinese Premier Li Keqiang (李克強) said a high corporate debt ratio “is not new in China” and China would seek to bring it down with capital-market reforms.
Zhou has stepped up efforts to cushion China’s economic slowdown, with the central bank announcing on Feb. 29 a 0.5 percentage point cut to the amount of deposits banks must hold as reserves.
Excessive monetary policy stimulus is not necessary to achieve China’s growth targets and prudent monetary policy would be maintained if there is not any big economic or financial turmoil, he said on Saturday last week.
RISKS
One option for addressing high leverage is to develop “robust capital markets,” Zhou said, echoing Li’s remarks.
China should also channel more savings into the corporate sector, he said.
Zhou, 68, has warned banks about increased credit risk and rising real-estate prices in the largest cities. Property prices have begun to diverge severely from values in less-populated areas and the country faces “relatively big” downward pressure from efforts to eliminate excess housing inventory, which might suppress prices nationwide, he said.
China must address short-term risks including “very high” levels of corporate debt, Organisation for Economic Co-operation and Development (OECD) secretary-general Angel Gurria said at the same forum. Sectors with especially high leverage include cement, steel, coal and flat glass, Gurria said.
The OECD estimates corporate debt alone now stands at 160 percent of China’s GDP according to Gurria.
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