Soft landing seen for Chinese debt
Pimco expects China to refrain from broad-based deleveraging
BEIJING: China’s deleveraging campaign will create pockets of pain in markets over the coming year, without curtailing borrowing to the extent that debt actually declines, according to Pimco.
Pacific Investment Management Co predicts that Chinese companies will be able to refinance most of their borrowings in the next 12 months as the authorities refrain from carrying out broad-based deleveraging.
This will contribute to debt expanding faster than nominal gross domestic product, said Luke Spajic, head of portfolio management for emerging Asia at Pimco, which manages US$1.7 trillion.
“The overarching issue is that we don’t envisage a drop in the debt stock,” Singapore-based Spajic said in a phone interview.
“In general, this market is domestically funded – so as long as China avoids a sharp economic slowdown over the next few years, then in all likelihood, this debt should all or in general be rolled over quite comfortably.”
His views come amid a concentrated deleveraging campaign in the world’s second largest economy, with officials including the People’s Bank of China governor signalling that the drive will deepen.
Still, measures of credit continue to show expansion, with aggregate financing surging to a sixmonth high of 1.82 trillion yuan (US$274bil) in September.
China’s corporate debt surged to 159% of the economy in 2016, compared with 104% 10 years ago, while overall borrowing climbed to 260%. Spajic, who also spoke at
The New Renminbi Reality Summit organised by Bloomberg Live in Singapore yesterday, said it isn’t unusual for China’s borrowing costs to climb at a time when global central banks are tightening.
Some parts of the economy may face “credit deterioration,” he said, adding that China may raise interest rates to keep borrowing costs elevated, maintain tight capital controls and add more restrictions on the housing market.
China is having a “story of debt growth,” Spajic said at the RMB Reality conference, adding that tightening by the authorities is beginning to bite.
Other speakers on the same panel were Neeraj Seth, managing director and head of Asian credit at BlackRock Inc, Jeffrey Chi, vice chairman of Vickers Venture Partners in Singapore, and Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Ltd.
In a speech kicking off the 19th Party Congress last week, President Xi Jinping said China will continue to strengthen financial regulation and defend against systemic risk.
He reiterated that housing is for living in, not speculation.