China met its target for reducing debt levels but will keep cracking down on riskier types of financing to contain risks to its financial system, the banking and insurance regulator said Monday, urging banks to step up lending to smaller companies.
Concern about China’s debt is rising again as Beijing ramps up support for a slowing economy. New bank loans hit a record in January despite increasing bad loans and record defaults in Y 2018.
Top officials have pledged not to resort to another massive spending spree like that during the global financial crisis, analysts say it is vital for policymakers to revive weak credit growth to avoid a sharper slowdown.
“After 2 years of work, various financial disorders have been effectively curbed,” Wang Zhaoxing, vice chairman of the China Banking and Insurance Regulatory Commission (CBIRC), told a news conference.
“This breaks overseas predictions that the ‘barbaric’ growth of shadow banking and the financial overheating of real estate might lead to systemic financial risks and crises in China.”
Barron’s recently reported that the latest figures from the People’s Bank of China (PBOC) suggest the policy of economic restraint could be moving into reverse.
“Aggregate financing to the real economy” rose by $685-B in January. According to analysts at CreditSights, January 2019 was the “fastest single-month growth since records began in 1992,” Barron’s said. The boomlet was led by the big state-run banks, which boosted their lending by 3.57-T RMB Yuan over the month.
While lending always tends to jump in January as banks rush to fill their new quotas and lock in customers before Chinese New Year, last month’s move was extraordinary.
In Ys 2016, 2017, and 2018, Chinese banks originated about 2.5-T RMB Yuan worth of loans each January. Last month’s figure represents an increase of more than 40%.
China has never revealed a specific target for its multi-year risk containment campaign and does not release comprehensive statistics on debt loads.
But documents provided by the regulator said the leverage level in the economy stabilized in Y 2018, meeting the target, after growing by an average of more than 10% a year.
“Our leverage level is basically stable. This is a marvelous achievement,” said Zhou Liang, another CBIRC vice chairman.
Authorities have tried since a Y 2015 downturn to curb riskier types of financing and a build-up in debt which international monitors like the International Monetary Fund (IMF) say could trigger a banking crisis in the world’s 2nd-largest economy.
However, the regulatory pressure drove up borrowing costs last year and made it harder for small firms to secure funding, dragging on business activity and prompting policymakers to shift their focus back to growth boosting measures.
Analysts worry that any halt to the financial risk campaign may also delay much-needed structural reforms, such as allowing market forces to dictate a more efficient use of capital.
The last round of China’s leverage crackdown is over for now, said Hao Zhou, senior emerging markets economist at Commerzbank, adding that the cycle of policy tightening and loosening normally shifts every 2 to3 years.
“Although China is loosening now, it’s possible that the loosening will end as soon as economic growth gathers momentum,” he said.
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