Beijing seen failing to address debt risks
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
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.