Bei­jing seen fail­ing to ad­dress debt risks

New Straits Times - - Business -

SHANG­HAI: China has launched per­haps its most con­certed push yet to clean up a toxic brew of un­reg­u­lated and risky lend­ing in­creas­ingly viewed as a threat to global fi­nan­cial sta­bil­ity, but do au­thor­i­ties re­ally mean busi­ness this time?

An­a­lysts don’t think so.

China’s ad­dic­tion to debt-fu­elled growth pow­ered the steady eco­nomic ex­pan­sion that the rul­ing Com­mu­nist Party craves, and it wouldn’t go cold turkey, they said.

“These things come in waves. It’s like ‘well, this time we mean it’. But to be blunt, I would fully ex­pect them to es­sen­tially re­treat,” said Bei­jing Univer­sity eco­nomics pro­fes­sor Christo­pher Bald­ing.

“At the end of the day, eco­nomic growth is the pri­or­ity.”

Fears are mount­ing that China is flirt­ing with a po­ten­tial disas­ter worse than the United States sub­prime collapse and sub­se­quent 2008 fi­nan­cial crisis, and Ja­pan’s 1990s as­set-bub­ble melt­down and re­sult­ing “lost decade”.

Moody’s In­vestor’s Ser­vice es­ti­mated in Oc­to­ber that China’s “shadow bank­ing” sec­tor — off­bal­ance-sheet lend­ing that evades of­fi­cial risk su­per­vi­sion — to­talled US$8.5 tril­lion (RM36.92 tril­lion), or nearly 80 per cent of its gross do­mes­tic prod­uct (GDP).

It surged by an ad­di­tional US$297 bil­lion in the first quar­ter of this year, ac­cord­ing to a Bloomberg anal­y­sis.

A poorly reg­u­lated as­set-man­age­ment in­dus­try that has fun­nelled cash into risky in­vest­ments tripled in size in just three years to reach US$3.8 tril­lion last year, ac­cord­ing to var­i­ous es­ti­mates.

China had over­all debt li­a­bil­i­ties equal to 264 per cent of GDP last year, Bloomberg Intelligence said, yet lend­ing is chug­ging ahead de­spite fears of a bub­ble in the cru­cial hous­ing sec­tor.

The sit­u­a­tion has reached “a level of ab­sur­dity in China that the planet has never seen”, said Anne Steven­son-Yang, re­search di­rec­tor at J Cap­i­tal in Bei­jing.

With­out ag­gres­sive ac­tion, “the top one per cent will be multi­bil­lion­aires and the rest of the coun­try will be squat­ting in empty build­ings by trash fires and for­ag­ing for food”.

The In­ter­na­tional Mon­e­tary Fund warned last month that Chi­nese debt crisis could “im­peril global fi­nan­cial sta­bil­ity”.

New bank­ing reg­u­la­tor Guo Shuqing, in­stalled in March, has is­sued what of­fi­cial Xin­hua news agency called a “reg­u­la­tory wind­storm” of di­rec­tives last month.

Pres­i­dent Xi Jin­ping upped the ante last Tues­day, call­ing for an all-out ef­fort to tighten su­per­vi­sion, pro­mote trans­parency, and iden­tify “hid­den trou­ble”, said Xin­hua.

The crack­down has rat­tled Chi­nese stocks, with Shang­hai’s key in­dex slid­ing nearly five per cent since April 11, sur­ren­der­ing all of its gains for the year.

Bei­jing prob­a­bly felt it was safe to act now due to un­ex­pect­edly strong first-quar­ter eco­nomic growth, said an­a­lysts, but it faced a pre­car­i­ous bal­anc­ing act.

Longer term, China needs steady growth as it tran­si­tions from an in­vest­ment— and ex­port-fu­elled eco­nomic model to one based on do­mes­tic con­sump­tion.

“Once eco­nomic growth starts to dip be­low ex­pec­ta­tions or goes down, reg­u­la­tors will ease up again,” said Chen Zhiwu, a Yale Univer­sity fi­nance pro­fes­sor.

Michael Every, Rabobank’s head of Asia-Pa­cific fi­nan­cial mar­kets re­search, said China is “hav­ing (its) cake and eat­ing it”.

“China wants mar­kets. And it wants sta­ble mar­kets. And it wants less bor­row­ing. And it needs more and more bor­row­ing to grow at the rate it deems nec­es­sary. Some­thing has to give,” he said. AFP

BLOOMBERG PIC

Moody’s In­vestor’s Ser­vice es­ti­mated in Oc­to­ber that China’s ‘shadow bank­ing’ sec­tor to­talled US$8.5 tril­lion, or nearly 80 per cent of its gross do­mes­tic prod­uct.

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