Mon, Jul 23, 2018 - Page 15 News List

Bank of Korea warns over China’s deleveraging plan

PREVENTIVE POLICY:The South Korean central bank said that with rising defaults, risks have expanded for companies that have invested in the debt of Chinese firms

Bloomberg

The economy of South Korea, which is reliant on China, might see more adverse effects than previously expected from China’s plan for deleveraging, the Bank of Korea said in a report yesterday.

South Korea’s GDP growth could be 0.3 percentage points less than expected this year and might be 1.2 percentage points less in 2020 because of China’s plan to cut financial risks by deleveraging, the central bank said in its report, citing data from Oxford Economics Ltd and Fitch Ratings Ltd.

South Korea recently trimmed its forecast for growth to 2.9 percent for this year from an earlier projection of 3 percent amid rising global trade tensions.

With the increasing possibility that financial risks such as shadow banking and corporate debts might have an effect on real economic growth in China, preventing such risks would be the top priority for Chinese policymakers for at least the short term, the report said.

Chinese President Xi Jinping (習近平) in 2016 began to curb risks in the nation’s financial markets and China has seen a record amount of bond defaults this year, the report said.

With rising defaults at Chinese firms, risks have expanded for companies in South Korea and other countries that have invested in the debt of Chinese firms, the Bank of Korea said, citing the case of South Korean brokerages investing in the debts of China Energy Reserve & Chemicals Group Co (中國國儲能源化工集團).

Still, the level of Chinese corporate debt defaults seems to be lower than in other countries, and it appears to be “a natural procedure” of restructuring zombie firms, the report said.

The central bank has left its policy rate unchanged since a 25 basis point increase in November last year to 1.5 percent, but signs of hawkishness have begun to emerge in recent months.

At the bank’s May meeting, some board members flagged the need to reduce the amount of policy accommodation, citing in part increased risks to financial stability amid a widening yield differential with the US, where the US Federal Reserve continues to signal that rates are on the rise.

However, fears over global trade tensions and slowing jobs growth have stayed the bank’s hand.

Ten of 24 economists surveyed by Bloomberg News from July 12 to Tuesday last week expected a rate hike at the bank’s remaining third-quarter meeting on Aug. 31, including those at JPMorgan Chase & Co, HSBC Holdings PLC and Deutsche Bank AG.

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