New signs show that China is getting back on its debt

A woman walks past the People’s Bank of China headquarters in Beijing, China.

Jason Lee | Reuters

BEIJING – The data for the year so far shows signs that China is starting to tackle debt.

A Q1 China Beige Book survey released Thursday found that state-owned borrowing fell to the lowest in the study’s roughly 10-year history. Total borrowing fell to its lowest in three years, while that of large corporations hit a five-year low, the report said.

Given its ties to the state, the government-affiliated companies are the “best signal” about the authorities’ policy intentions, China Beige Book director Shehzad Qazi said in a note. The company conducts quarterly surveys of companies in China.

Economists note that China’s relatively low GDP target of over 6% this year allows policymakers to tackle issues such as high debt without worrying too much about growth. Prior to last year’s coronavirus pandemic, China had tried to curb that debt growth with mixed results.

While Qazi noted that more quarterly data will be needed to determine whether China has returned to full “deleveraging” mode, there are other signs that authorities are trying to get debt under control.

China’s debt ratio rose to 285% at the end of the third quarter of 2020, from an average of 251% between 2016 and 2019, according to a report from Allianz on Monday, citing an analysis of its subsidiary Euler Hermes.

While that debt ratio has not declined, it has stabilized, senior economist Francoise Huang said in a phone interview Tuesday. “Stabilization is already a good sign and probably one of the goals of the deleveraging campaign of Chinese policymakers.”

She pointed out that a nationwide debt measure called aggregate financing has slowed growth since October.

Year-on-year, total funding to the real economy grew 44.39% in October, but has since declined, according to data from Wind Information. The figure showed an increase of 16.19% in February.

Chinese regulators have been warning of financial risks in recent weeks, especially in stocks and the real estate market. Prime Minister Li Keqiang said in an annual report on the economy earlier this month that China has recovered sufficiently from the coronavirus pandemic and that no related bond issue is planned.

One concern about this slump in support is that banks may not be as eager to lend money to smaller, private companies as they were during the pandemic, when Beijing specifically encouraged such lending. China’s largest banks are state-owned and prefer to work with state-owned companies rather than riskier private ones. But the private sector contributes to most of China’s jobs and growth.

“I think policymakers want private and especially (SMEs) not to worry about this deleveraging,” said Huang. “But I think it is ultimately something that affects all types of businesses.”

Bank loans for carbon emissions targets

Moody’s expects credit growth to “be more moderate this year,” especially as new restrictions apply to lending in real estate-related industries, said Nicholas Zhu, vice president and senior credit officer at Moody’s Investor Service.

He added that China’s emphasis on maximum carbon emissions by 2030 will lead to more demand from companies to finance renewable energy projects. But he said banks will be more cautious about lending due to past experiences with Chinese solar companies, many of which have gone bankrupt.