Thu, Feb 18, 2016 page13

• China debt binge sparks concern over rising risks

  • Bloomberg
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  China’s unprecedented jump in new loans at the start of this year is fueling concern that excessive credit growth is piling up risks in the nation’s financial system.

  The increase in China’s debt relative to GDP could pressure the nation’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high.

  Credit growth is storing up “big problems” in the economy that will weigh on the yuan and stocks, said George Magnus, an economic adviser to UBS Group AG.

  Mizuho Bank Ltd warned that the threat of bad loans is rising and Marketfield Asset Management said China’s central bank might be losing its regulatory grip on credit growth.

  While part of last month’s surge in new debt to a record 3.42 trillion yuan (US$525 billion) was caused by seasonal factors and a switch into local-currency liabilities from overseas borrowings, the risk is that bad debts would jump as companies find fewer profitable projects amid the slowest economic expansion in a quarter century.

  Soured loans at Chinese commercial banks rose to the highest level since June 2006 at the end of last year and the nation’s biggest lenders trade at a 33 percent discount to net assets in the stock market — a sign that investors see further writedowns to banks’ loan books.

  The jump in credit growth “may help to sustain the pace of economic momentum in the short term, but it’s storing up big problems,” said Magnus, a senior independent economic adviser to UBS who correctly predicted in July last year that the rout in Chinese stocks would deepen. “I’m not anticipating an imminent meltdown, but we’ve got a lot of warnings going on that should make us cautious about how we see the situation developing for the course of this year.”

  China’s ratio of corporate and household borrowing versus GDP rose to 209 percent at the end of last year, the highest level since Bloomberg Intelligence began compiling the data in 2003. Nonperforming loans increased 7 percent in the fourth quarter to 1.27 trillion yuan, data from the China Banking Regulatory Commission showed on Monday.

  “While corporate financial risks are not as high as what the leverage level suggests — as companies tend to hold a lot of liquid assets — the increase in the debt-to-GDP ratio still poses a systemic risk, which could potentially add pressure to ratings,” Kim Eng Tan (陳錦榮), senior director of Asia-Pacific sovereign ratings at S&P, said in an interview in Shanghai.

  China’s long-term credit rating at S&P is “AA-,” with a stable outlook. That is the fourth-highest ranking and puts the country on a par with Chile and South Korea.

  In a report in November last year, the company said China could be downgraded if weak economic or financial sector trends materially increase the government’s contingent fiscal liabilities, or if policymakers try to boost growth by expanding credit to fund investment spending.

  Magnus said it is unlikely Chinese officials are directing a credit surge on par with that of 2008 and 2009, when the message from the nation’s leadership was to “lend as much as you can.” Yet he is concerned that policymakers are showing an “insufficient willingness” to rein in leverage, even as they pledge to tackle the nation’s debt problems.

  China’s main government organs have vowed to tackle overcapacity, safeguard the asset quality of banks and limit loans to “zombie” companies, according to a joint statement issued on Tuesday by agencies, including the People’s Bank of China (PBOC), the National Development and Reform Commission, and the Ministry of Finance.

  “Although the government and other senior officials do talk about deleveraging and slowing credit creation, a lot of it is talk,” Magnus said. “We don’t see very much in the way of concrete actions to try to limit the amount of new credit going into the economy.”

  Marketfield Asset’s Michael Shaoul said the PBOC’s ability to prevent excessive credit growth might be waning as the country loosens regulatory control over the financial system.

  “How much of this is a result of deliberate policy rather than extreme moves made by the private sector is open to argument,” Shaoul said in an e-mailed note. “We increasingly suspect that the PBOC has lost substantial control of the events we are witnessing, with both the partial deregulation of financial markets and multiple conflicting policy aims making regulatory control increasingly difficult without massive unintended consequences.”

  Chinese markets suggest investors are braced for a pickup in bad debt. The nation’s four biggest lenders by market value — the Industrial & Commercial Bank of China Ltd (中國工商銀行), China Construction Bank Corp (中國建設銀行), Agricultural Bank of China Ltd (中國農業銀行) and Bank of China Ltd (中國銀行) — are valued at an average 0.68 times net assets in Hong Kong’s equity market, near the lowest level on record, even after climbing on Tuesday amid a broader rally in equities.

  Meanwhile, China credit default swaps rose to the highest level since 2012 on Friday last week, according to data compiled by Bloomberg. The Hang Seng China Enterprises Index of mainland shares in Hong Kong dropped 1 percent at the close yesterday, while the Shanghai Composite Index increased 1.1 percent.

  “All in all, we are more cautious to read these figures as a positive signal for China credit market recovery,” Ken Cheung, a strategist at Mizuho in Hong Kong, wrote in an e-mailed note.
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