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2016-07-12 12:32:19
Plans to rein in credit slowly take shape
Jul 9th 2016 | SHANGHAI
AS ANYONE who has conquered addiction knows, the first step is admitting that
you have a problem. China, hooked on debt for much of the past decade, may be
reaching that point. In recent weeks officials have talked at length about the
country s troubling reliance on credit to fuel growth. They have also sketched
out a range of possible solutions. It is only a start withdrawal symptoms in
the form of defaults and slower growth are sure to hurt, and could yet prompt a
relapse. But the new tone is encouraging nonetheless.
The frankest admission came in a front-page article in the People s Daily,
mouthpiece of the Communist Party, in early May. An anonymous authoritative
person , widely believed to be Liu He, an economic adviser to President Xi
Jinping, warned that high leverage could spark a systemic financial crisis.
China s total debt load jumped from less than 150% of GDP in 2008 to more than
250% at the end of last year. Increases of that size have presaged economic
trouble in other countries.
Last month the government convened its first news conference on the topic,
bringing together officials from the finance ministry, the central bank, the
banking regulator and a top planning agency. The Chinese Academy of Social
Sciences, a prominent official think-tank, has also opined on it. The research
arm of the central bank has published a paper with a section on what can be
done. And this week, a forum in Beijing gathered officials, bankers and
academics to sift through the suggestions.
All of them have homed in on corporate debt as the main worry. That is obvious
enough from a quick comparison with other big economies: China sits in the
middle of the pack for total debt but is at the high end for corporate
liabilities (see chart). Yet it marks a change of tone from recent years, when
officials focused on cleaning up the debt of local government. This presented a
more immediate but smaller problem, and also a more manageable one.
The most important outcome from all the discussions has been an outline, albeit
rough, of how China hopes to tackle its burden. There will be no rush to
deleverage. Sun Xuegong, a central planner, said China would start by slowing
the rise in its debt-to-GDP ratio before guiding it lower, trying to avoid too
much collateral damage to the economy in the process.
Officials think they can cushion the blow from eventual deleveraging in three
ways. First, they want to get more bang from new debt. That, in theory, means
choking off credit to underperforming state-owned firms or restructuring them
in the image of their sleeker private-sector peers. Loans would flow to better
firms generating higher returns.
Second, they want equity financing to help replace debt. That is tough, given
the woeful state of the stockmarket after last year s crash. But there are
other ways. Regulators are working on a programme under which banks will swap
some loans to indebted companies for equity stakes instead. Banks have pushed
back, fearing that they will be saddled with bad investments. Officials insist
that only viable companies will receive this treatment.
Finally, the government will use fiscal policy to prop up growth, in effect
transferring debt from corporate balance-sheets to its own. That makes sense:
official public debt is low, at less than 50% of GDP, while state-owned
companies are the biggest debtors. However, direct bail-outs would give state
firms little reason to improve their operations. So the central bank s
researchers suggest other measures, such as tax cuts, which would improve the
business environment for all.
Scepticism about whether China will end its credit binge is warranted. Last
December the government identified deleveraging as one of its main tasks for
2016. Yet credit issuance has outpaced economic growth by a wide margin,
raising overall debt levels. And China s approach to state firms is
inconsistent. Officials recognise that getting them to operate more like
private firms, constrained by budgets, is critical to controlling debt. But at
the same time the Communist Party recently reiterated that they must obtain its
approval before making any big decisions. China is sure to keep one promise, at
least: there will be no speedy resolution to its debt problems.