China shifts gear from growth to debt cuts in race against rising tide of red ink
China’s policymakers will focus on clawing back leverage for the rest of the year amid estimates that the country’s debt levels have surpassed 300 per cent of GDP.
“We won’t allow the leverage ratio to rise for the sake of maintaining growth,” Yang Weimin, a senior economic official and close aide to President Xi Jinping, said in Beijing on Thursday.
“In the second half of this year, we will focus on the job of cutting leverage because it is the source of all risks.”
The shift in priority from upholding growth to containing risks came after China’s GDP grew 6.9 per cent in the first half, above the central government’s full-year target of about 6.5 per cent.
It also comes just weeks after the Institute of International Finance said the country’s total debt might have shot above 300 per cent in May.
A separate study by the Bank for International Settlements concluded earlier this year that China’s overall debt rose to 257 per cent of GDP last year. Most of corporate debt was incurred by state-owned firms, it said.
Yang, a vice-minister of the Office of Central Leading Group for Financial and Economic Affairs, the ruling Communist Party’s economic decisionmaking body, said Beijing had learned the lessons of the US subprime crisis and was trying hard to avoid any systemic risks of its own.
China had to tackle excessive interbank borrowing, local government debt and unpaid loans by state-owned enterprises so that they would not present a serious threat to the national economy, Yang said.
Yang said the central government had room to cut leverage and avoid a big slowdown, and would focus its debt reduction efforts on the state sector.
“If the leverage ratio in the state sector is reduced, the whole corporate sector leverage ratio will be reduced, along with the leverage ratio in the overall economy,” he said.
On the surface, the worst should be over for the world’s second-biggest economy. Headline growth has stopped slowing, the country’s foreign exchange reserves have stopped shrinking, and the yuan strengthened to a nine-month high against the US dollar on Thursday.
The International Monetary Fund also lifted its forecasts for China’s growth on Monday, and Moody’s Investors Service, which downgraded China’s sovereign rating in May, said on Thursday it was upping the outlook for the banking system from negative to stable.
But there are still strong fears about the fragility of the country’s financial system.
On Monday, thousands of people took to the capital’s streets to stage a rare protest over a police crackdown on a pyramid fundraising scheme.
And People’s Daily, the Communist Party’s mouthpiece, has also warned Beijing to watch out for “black swan” and “grey rhino” risks, referring to major unforeseen or ignored threats.
Wang Zhijun, head of the leading group’s economic bureau, said China’s “grey rhino” risks included shadow banking, the property market bubble, high state-sector borrowing, high local government debt and illegal fundraising schemes.
