Beijing to cut off credit and rebalance economy

NO MORE CHEAP DEBT::Yesterday’s announcement was the latest sign that policymakers are determined to bring China’s debt-fueled expansion under control

Reuters, BEIJING

Sat, Jul 06, 2013 - Page 14

China said yesterday it would cut off credit to force consolidation in industries plagued by overcapacity as it seeks to end the economy’s dependence on extravagant investment funded by cheap debt.

In a statement by the State Council, Beijing laid out broad plans to ensure banks support the kind of economic rebalancing China’s new leadership wants to see as it looks to focus more on high-end manufacturing.

Chinese President Xi Jinping (席近平) and Premier Li Keqiang (李克強) have flagged for some time that the rapid growth of the past three decades needs to shift down a gear, while analysts said the announcement was a signal that they intend to press on with reforms, despite evidence of a sharper-than-expected slowdown.

“The guideline shows China’s policymakers will focus more on economic restructuring to stabilize the economy, rather than providing more liquidity to support economic growth,” said Li Huiyong (李慧勇), an economist at Shenyin Wanguo Securities (申銀萬國證券) in Shanghai.

The slowdown in the world’s second-largest economy has started to put pressure on some firms.

Yesterday, China Rongsheng Heavy Industries Group (中國熔盛重工), China’s largest private shipbuilder, appealed for financial help from the government and its major shareholders, after cutting its workforce and delaying payments to suppliers.

Analysts said the company could be the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about a half last year.

The State Council said it would ensure credit kept flowing to businesses that it thought had competitive products, but it would work with banks to oversee a gradual winding down of other businesses.

“The government will adopt differentiated policies based on the varied situations in the industries plagued by overcapacity,” it said.

Yesterday’s announcement was the latest sign that China’s policymakers are determined to bring debt-fueled expansion under control, after the central bank allowed a cash crunch last month that sent short-term lending rates to record highs.

Ma Tao, an analyst with CEBM Group, an institutional investment research firm in Shanghai, said sectors such as construction materials, steel and aluminum are suffering from overcapacity, as well as high debt and financing costs.

“The recent credit crunch also served as a catalyst for their cash flow problems to emerge as liquidity has not been eased,” Ma said.

The State Council also said that, in future, so-called wealth management products issued by banks would have to be linked to specific projects, rather than being mixed together with other pools of credit.

Such a move would prevent some of the riskier lending practices in the shadow banking market that the central bank has been trying to address.