Chinese banks lent more money in
January alone than the annual GDP of
South Africa, as borrowers rushed to
take advantage of government policies
intended to stimulate the economy with
easy credit.
But the free-for-all has had unintended
consequences, creating a tottering tower
of unsustainable debt, with Beijing now
trying to tighten monetary policy and
reduce access to credit without bringing
the entire edifice crashing down.
Chinese debt exceeded 270 percent of
the country’s GDP by the end of 2016,
stoked by multiple interest rate cuts as
well as the growth of the unregulated
“shadow finance” credit sector which
involves lending to already indebted
companies.
Thanks in part to the easy credit,
China’s economy — a key driver of
global growth — expanded by 6.7
percent last year, with a construction
boom and increased public spending on
infrastructure.
But the world’s second largest economy
is now saddled with an unwieldy debt
load, Andrew Fennell of ratings agency
Fitch said in a January 23 note, adding
that “China’s stable growth reflects
stimulus, not sustainability”.
Standard & Poor’s also warned that
“reliance on credit-fuelled growth poses
the downside risk of a hard landing for
the economy.”
– ‘The risk is immense’ –
The People’s Bank of China (PBOC), the
country’s central bank, helped stimulate
the out of control lending with multiple
interest rate cuts between the end of
2014 and 2016, lowering the cost of
credit.
The abundance of cheap cash has had
unexpected consequences: the cost of
garlic jumped 80 percent last year on
speculation, investors poured money
into bitcoin and real estate prices in
some parts of the country have gone
through the roof.
Last year the average price per square
metre jumped 14 percent in Beijing, 38
percent in Nanjing and a staggering 49
percent in the southern city of
Shenzhen.
At the same time, empty apartment
buildings have mushroomed across
other cities where builders are
struggling to find clients willing to
invest in their speculative ventures.
The “monetary policy has only inflated
the real estate bubble,” economist Zhong
Pengrong, CEO of Shiye, told AFP.
“If the market collapses, the risk is
immense,” he said.
Although a dozen municipalities have
recently tightened rules on apartment
purchases, overheating persists, with
home loans accounting for a record one-
third of bank lending in January.
Hamstrung by the need to prop up
growth while also reining in
speculation, the PBOC has sent mixed
signals on monetary policy.
It injected additional liquidity into the
financial system before the Lunar New
Year, when demand for cash is
traditionally strong.
Then in early February the bank raised
short-term rates in the money market
by 10 basis points for the first time in
four years.
Societe Generale analyst Wei Yao said
the bank was attempting a precarious
balancing act.
“The high debt level and the previously
hasty expansion of banks’ balance
sheets make the financial system
vulnerable to too abrupt a change,” she
said.
“The tightening cannot be too harsh.”
– Thirst for liquidity –
Authorities are also worried about the
intensifying risk of corporate defaults,
particularly in the unregulated “shadow
finance” sector that covers loans to
heavily indebted manufacturers and
property developers.
Social financing — a broad measure of
credit including that offered by non-
bank entities — soared to 3.740 trillion
yuan ($545 billion) in January, double
that in December, according to the
PBOC.
These unregulated schemes include
company-to-company lending, which
jumped 20 percent in 2016 to $1.92
trillion, according to data firm CEIC.
Commercial banks have traditionally
been reluctant to loan money to small
and medium-sized businesses,
regardless of interest rate cuts, leaving
owners with little choice but to turn to
“shadow financiers” to quench their
thirst for liquidity.
A jump in interest rates is unlikely to
affect the demand for this kind of
lending, meaning there is no immediate
solution in sight.
Under these conditions, analysts say, it
will likely take a long time to get China’s
debt monster under control as the
country attempts to re-balance its
economy.
“China economy is a bit like a high-
speed train,” Zhang Fayu, economist
and manager for assets management
firm Million Tons Capital in Shanghai,
told AFP.
“It must slow down well in advance
before turning.”
