China’s bad bank woes point to deeper problems

If the problems within bad debt managers were confined to them, Beijing might have been able to resolve them more easily.

They are not, indeed, they reflect a much larger problem of bad loans and excessive debt within China’s corporate sectors and local government, a problem exacerbated by the pandemic.

China’s overall debt level skyrocketed during the pandemic because, like most governments, it injected massive doses of stimulus into its economy. In the case of China, as it has traditionally done, it responded to the COVID-19 outbreak with an infrastructure investment program.

The Chinese authorities like to present a picture of total control and predestined success, but, under the otherwise impressive progress and growth that they have presided over, there are serious loopholes within the economy and financial system that, despite concerted efforts, they have yet to get along with.

The overall debt-to-GDP ratio peaked at around 285% in the third quarter of last year and has since declined as the authorities, with the economy rebounding, rushed to withdraw stimulus and cut back. resume the longer-term deleveraging campaign that the pandemic disrupted. It now sits at around 276 percent.

The challenge for China, however, does not lie in this overall ratio, which is lower than that of many advanced economies, including the United States, where the Biden administration is still adding massively to the spending explosion triggered by the pandemic.

Its stake relates to the composition of its debt. Public debt is low by international standards – total public debt is only about 45% of GDP – but corporate debt is high and credit quality is low.

The Chinese authorities like to present a picture of total control and predestined success, but, under the otherwise impressive progress and growth that they have presided over, there are serious loopholes within the economy and financial system.Credit:PA

The debt ratio of non-financial enterprises of around 160 percent of GDP is worrying, given the degree of indebtedness and the quality of assets in the sector and in particular within public entities.

Household debt has also grown rapidly since the 2008 financial crisis, and has more than doubled to around 60% of GDP. While this figure is also quite low by international standards, it is clearly of concern for an economy trying to shift from exports to domestic consumption.

Before the pandemic and since its strong economic recovery, Chinese authorities were, and still are, struggling with leverage and loan quality within the corporate sector and their state-owned enterprises (SOEs) in particular. , as well as with debt within local communities. governments and their off-balance sheet financing vehicles. They also cracked down on peer-to-peer ending in the household sector.

Loading

Borrowing by state-owned companies and local governments has exploded during the pandemic as they complied with Beijing’s stimulus guidelines, with a significant amount of unproductive investment in infrastructure and, in particular, real estate development.

Local governments face a particular problem: they have to follow Beijing’s orders but have limited capacity to generate revenue, hence resorting to debt.

A crisis earlier this year among major Chinese real estate developers appears to have been averted, as sector borrowing plummeted in response to a tightening of bank lending rules and a central government decree barring heavily indebted developers from raising their funds. debt.

Nonetheless, SOE entities are defaulting on their loans at record levels and, with nearly $ 4 trillion in bonds issued by these entities (around three-quarters of them onshore), the potential for contagion and panic and a crisis would worry the authorities.

For all over-indebted entities, including Huarong and his peers, growth would help alleviate their problems.

With China aiming for an economic growth rate above 6% this year and may well exceed that target, given the impacts of last year’s pandemic, the era of double-digit growth is long over and over and over. , with an aging population and relatively modest productivity gains in a still developing economy, growth is unlikely to solve the challenges created by the combination of excessive debt and poor credit quality.

The Chinese State Council has adopted a policy of forcing local government funding vehicles to restructure or fail if they cannot service their debts, although any major government vehicle defaults. local would send a shock wave to the debt markets which have long assumed they had implicit government support.

Huarong and the other bad banks present an even more difficult problem due to their size and deep ties to the wider financial system.

Loading

While the government will want to decrease the extent to which its response to their problems increases the level of moral hazard in its system, they may well be too big to fail.

At present, it appears authorities are looking for ways to postpone the problem, with some suggestions that alongside a possible merger of the four failed banks, some of Huarong’s bad assets could be transferred to another entity in State to keep it afloat without a direct bailout.

The Chinese authorities like to present a picture of total control and predestined success, but, under the otherwise impressive progress and growth that they have presided over, there are serious loopholes within the economy and financial system that, despite concerted efforts, they have yet to get along with.

The Market Recap newsletter is a summary of the day’s exchanges. Get it every weekday afternoon.


Source link

About Harry Qualls

Harry Qualls

Check Also

3 things to watch out for when the ECB meets on Thursday

Text size European Central Bank President Christine Lagarde arrives to attend a plenary session at …