China's cen­tral bank chief sounds warn­ing over ris­ing debt

The Pak Banker - - FRONT PAGE -

Peo­ple's Bank of China Gov­er­nor Zhou Xiaochuan sounded a warn­ing over ris­ing debt lev­els, say­ing cor­po­rate lend­ing as a ra­tio to gross do­mes­tic prod­uct had be­come too high and the coun­try must de­velop more ro­bust cap­i­tal mar­kets.

China still has a prob­lem with il­le­gal fundrais­ing and fi­nan­cial ser­vices are in­suf­fi­cient, Zhou said in a speech at the China Devel­op­ment Fo­rum in Beijing on Sun­day. He said the coun­try still needs reg­u­la­tion to guard against ex­ces­sive leverage in for­eign cur­ren­cies. "Lend­ing as a share of GDP, es­pe­cially cor­po­rate lend­ing as a share of GDP, is too high," Zhou said. He said a high leverage ra­tio is more prone to macroe­co­nomic risk.

Chi­nese lead­ers are strug­gling to bal­ance be­tween the meet­ing a tar­get of at least 6.5 per­cent av­er­age an­nual growth to 2020, while ad­dress­ing grow­ing debt lev­els. In a brief­ing on March 16, Premier Li Ke­qiang said a high cor­po­rate debt ra­tio "is not new in China" and China would seek to bring it down with cap­i­tal-mar­ket re­forms.

Cor­po­rate debt alone now stands at 160 per­cent of China's GDP, ac­cord­ing to the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment. The group's sec­re­tary-gen­eral, An­gel Gur­ria, said ear­lier in the day that sec­tors with es­pe­cially high leverage in­clude ce­ment, steel, coal and flat glass, and China must ad­dress the is­sue. He called it a short­term risk. Zhou, 68, spoke on the sec­ond day of a three-day fo­rum, where some of the world's best-known ex­ec­u­tives -in­clud­ing Face­book Inc.'s Mark Zucker­berg, UBS Group AG's Ser­gio Er­motti and In­ter­na­tional Busi­ness Ma­chines Corp.'s Ginni Rometty -- min­gled with top govern­ment of­fi­cials. The Chi­nese lead­er­ship's mes­sage over­all was that it would press ahead with nec­es­sary struc­tural re­forms even as eco­nomic growth slows.

"That tran­si­tion is go­ing to be good for China and is go­ing to be good for the world," In­ter­na­tional Mon­e­tary Fund Man­ag­ing Di­rec­tor Chris­tine La­garde said at the event. "Like any tran­si­tion, it will not go with­out some bumps on the road. And we should ex­pect them be­cause there is a del­i­cate bal­ance to be struck be­tween de­lib­er­ately slow­ing econ­omy and re­forms that need to be ac­cel­er­ated." Lead­ers in­clud­ing the PBOC's Zhou have stepped up ef­forts to cush­ion China's eco­nomic slow­down, with the cen­tral bank an­nounc­ing on Feb. 29 a 0.5 per­cent­age point cut to the amount of de­posits banks must hold as re­serves. Ex­ces­sive mon­e­tary pol­icy stim­u­lus isn't nec­es­sary to achieve China's growth tar­gets and pru­dent mon­e­tary pol­icy will be main­tained if there isn't any big eco- nomic or fi­nan­cial tur­moil, he said March 12. One op­tion for ad­dress­ing high leverage is to de­velop "ro­bust cap­i­tal mar­kets," Zhou said. The coun­try should chan­nel more sav­ings into the cap­i­tal mar­kets, which will help re­duce leverage in the cor­po­rate sec­tor and boost eq­uity fi­nanc­ing, he said.

China's yuan has de­clined 4.5 per­cent since a sur­prise de­val­u­a­tion in Au­gust spooked global in­vestors and spurred cap­i­tal out­flows. The na­tion's de­fense of the currency de­pleted its for­eign-ex­change re­serves by $513 bil­lion last year, the first-ever an­nual drop.

Asked about a rapid de­cline in China's for­eign-ex­change re­serves, Zhou said growth in re­serves have been "ex­plo­sive" af­ter 1997 and be­tween 2002 and 2008. Given the speed with which in­flows grew, it was now only nat­u­ral to see big out­flows.

"It may well be that for too long a lot of in­vestors were be­ing used to hav­ing a currency that was ap­pre­ci­at­ing, and of course it moves both ways de­pend­ing on cir­cum­stances," La­garde said at a ques­tion-and-an­swer ses­sion with Zhou. She said the yuan's rate was broadly in line with fun­da­men­tals.

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