China’s corporate debt levels are excessively high, People’s Bank of China (PBOC) Governor Zhou Xiaochuan (周小川) said yesterday, as policymakers in the world’s second-largest economy grow increasingly concerned about the risks from a rapid build-up in debt and an overheating housing market.
Banks cannot support firms with high leverage, Zhou told reporters at a press conference on the sidelines of the annual legislative session, but he stressed that China’s efforts to cut debt levels will take time, describing it as a medium-term process.
Measures by local governments to cool rising house prices will temper mortgage demand to some degree, but housing loans will continue to grow at a relatively rapid pace, Zhou said.
China needs to first stabilize its overall debt levels and slow the pace at which debt is rising, PBOC Deputy Governor Yi Gang (易綱) said at the same briefing.
China’s corporate debt has soared to 169 percent of GDP, according to figures from the Bank for International Settlements.
Even as policymakers warn of debt risks, heavy stimulus is still evident in record lending from mostly state-owned banks and increased government spending on infrastructure projects.
China’s banks extended a record 12.65 trillion yuan (US$1.83 trillion) of new loans last year. Lending in January was the second highest on record and did not slow as much as expected for last month.
China’s debt to GDP ratio rose to 277 percent at the end of last year from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS AG said in a note.
In recent months, the PBOC has cautiously moved to a modest tightening bias in a bid to cool explosive growth in debt and discourage speculative activity, though it is treading cautiously to avoid hurting economic growth.
It surprised financial markets by raising short-term interest rates in January and last month by marginal amounts, and is expected to bump them higher in coming months, though an increase in its benchmark policy lending rate is seen as unlikely this year.
Zhou said moving to a neutral policy stance would help with China’s supply-side reforms, reiterating that it would be “prudent” while reminding markets that the central bank has many policy tools at its disposal.
China’s definition of “supply-side reforms” is murky, but can include measures to discourage inefficient investment such as that which led to a massive overhang of excess industrial capacity after the global financial crisis.
However, there is not enough evidence yet that the PBOC’s moves to curtail riskier off-balance sheet lending are having any meaningful effect, Bank of America Merrill Lynch Global Research said in a note on Thursday.
Turning to the yuan currency, Zhou repeated the standard party line that he expects the exchange rate to be stable this year, while conceding that some fluctuations are normal.
Despite repeated interventions by authorities last year, the yuan still fell 6.5 percent against the US dollar. It has steadied early this year as authorities moved to tighten controls on capital outflows and as the dollar’s rally lost steam.
The yuan started to wilt again in recent sessions on growing expectations that the US central bank will raise interest rates as soon as next week, buoying the greenback.
China burned through nearly US$320 billion of reserves last year to shore up the yuan and staunch capital outflows.
In January, reserves fell below the closely watched US$3 trillion level for the first time in about six years, but Zhou told reporters that markets should not overreact to such falls.
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