China’s debt defaults not systemic risk if economic growth reasonable
Print Edition
CHINA’S debt defaults will not pose a systemic risk as long as economic growth stays within a reasonable range, a state planning official said yesterday.
The country’s overall debt risk is generally controllable, and corporate leverage ratios even have room to rise if economic growth falters, Sun Xuegong of the National Development and Reform Commission said at a briefing on issues related to China’s rising debt levels.
The briefing was attended by senior officials from the planning agency, the banking regulator, the central bank and the finance ministry.
“Overall, government and household debt ratios are relatively low but corporate debt ratios are relatively high. Proactive fiscal policy will help promote economic growth,” said Wang Shengbang, an official with the China Banking Regulatory Commission.
“Growth is vital for deleveraging; there will be no deleveraging if there is no growth.”
The government also has room to raise debt levels, which will help lower corporate leverage, the official said.
Global investors are increasingly worried that China’s continued efforts to stimulate economic activity and hit growth targets are driving debt up, raising risks to the country’s banking system.
A much promised campaign to cut industrial overcapacity could add to the dangers of more bad loans and defaults, while deleveraging — reducing debt burdens — could further weigh on firms and the economy.
Rising corporate debt in China and its potential to handicap long-term growth was the most-cited risk to companies’ outlooks in Reuters’ latest Asia corporate survey.
Top Chinese policy makers may share some of those concerns about excessive credit.
Last month, the People’s Daily quoted an “authoritative person” as saying China may suffer from a financial crisis and economic recession if the government relies too much on debt-fueled stimulus.
China’s total debt load rose to 250 percent of gross domestic product last year, and the IMF recently warned the high corporate debt ratio of 145 percent of GDP could lead to slower economic growth if not addressed.
There will be no quota on local government debt swaps this year, though governments are expected to refinance maturing debt, of which there is 5 trillion yuan (US$761 billion) this year, finance ministry official Wang Kebing said on the sidelines of the meeting.
Last year, local governments refinanced 3.2 trillion in debt through lower-interest-rate bonds, with another 11 trillion yuan needing to be refinanced.
NDRC’s Sun said China will further develop capital markets to boost equity financing, which would help lower debt at companies.
Banks’ bad loan ratios are rising but are still at relatively low levels, CBRC’s Wang said, adding that banks have written off 2 trillion yuan worth of bad loans in the past three years.
Chinese commercial banks’ non-performing loans rose to an 11-year high of 1.4 trillion yuan, or 1.75 percent of total bank lending, by end-March, earlier data showed.
“Over the past three years, banks used provisions to write-off 2 trillion yuan in non-performing loans, based on market principles. If those bad loans had not been disposed, the non-performing loan ratio might have been about 4 percent,” CBRC’s Wang said.
A debt-for-equity swap program proposed earlier this year to ease company’s debt burdens and let banks convert bad loans must follow market and legal principles, Sun said.
“Zombie firms” and companies with poor credit records will be excluded from the debt-to-equity swap program, Sun said, adding that the plan has yet to be finalized.
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