China debt mounting

Chinese  national debt or government debt of the People’s Republic of China is the total amount of money owed by the government and all state organizations and government branches of China. As of March 2016, it stands at approximately CN¥ 28 trillion or US$ 4.3 trillion, equivalent to about 41% of GDP.

China’s own finance ministry has warned that some local authorities are struggling to meet day-to-day operating costs, as they find themselves caught between supporting often inefficient local businesses – making steel, for example – or funding the unpaid debts and unemployment costs associated with shutting down or reforming the mainstays of regional economies.

President Xi Jinping said slashing debt was one of the “critical battles” Beijing would fight over the next three years, along with reducing pollution and poverty. Regulators have cracked down on the shadow banking sector, and the government has put the brakes on Anbang Insurance Group, HNA Group and Dalian Wanda Group, conglomerates that spent billions on debt-fueled acquisition sprees for trophy assets around the world. On Feb. 23, regulators charged Anbang founder Wu Xiaohui with fraud and embezzlement and officially took over its operations.

Together, such efforts have sent a strong message about Beijing’s determination to purge the financial system of excessive risk-taking — a message that is expected to be driven home when the National People’s Congress begins March 5. In the process, regulators have helped ease fears that China’s debt mountain would lead to a systemic crisis on the order of the 2008 global financial meltdown or the 1997 Asian financial crisis.

The lingering concerns over the sheer size of the China’s debt pile, which UBS estimates represented 272% of GDP at the end of 2017. But there are also growing worries about the potential unintended consequences of the authorities’ efforts to rein in that debt.

The regulatory chill is already having an impact on businesses large and small. Chinese direct investment in North America last year fell 35% from 2016 as a result of the official crackdown on the leveraged purchases of assets such as luxury hotels, premier sports teams and Hollywood studios, according to a report from law firm Baker McKenzie and Rhodium Group, a consultancy.

Bank of Jinzhou and other second- and third-tier banks across China are among those that still pose challenges. Prior to its listing, Bank of Jinzhou seemingly violated every rule of prudent banking. Lending money, which should be the core activity for such banks, was only a small part of what it did. Instead, it invested in and sold the high-yielding, complex wealth management products that the China Banking Regulatory Commission (CBRC) has been attempting to rein in as part of its attempt to control shadow banking.

In its mid-2017 financial report, Bank of Jinzhou was in somewhat better shape than two years earlier. Its listing had provided the bank with more equity to cushion against losses, and it had cut back on wealth management products. But 23 billion yuan worth of them remained on the books.

Even as China tightens control of lending practices, many companies are finding other ways to borrow. Some of them, especially in out-of-official-favor sectors such as property, are raising money in the U.S. dollar bond market, allowing them to avoid onerous requirements at home while taking advantage of the recent strength in the yuan. This, too, carries risks: The currency mismatch could come back to haunt them if the yuan weakens again.

Chinese economy looks solid, and fears that it would spark a systemic crisis have receded. Yet the country’s leaders continue to sound the alarm about excessive debt — including Xi, who will have even greater control over the economy now that Beijing plans to scrap the two-term limit for the presidency.

In mid-January, Guo Shuqing, chairman of the CBRC, said in an interview with the People’s Daily that rising levels of bad debt, poor risk management and shadow banking could lead to a possible “black swan,” or unforeseen economic event.

“We need to focus on reducing the debt ratio of companies, restricting household leverage, strictly control cross-financial sector products [and] continue to dismantle shadow banking,” he added. “Currently, the overall risk of the country’s financial system is controllable, but the financial sector is still in a risk-prone period due to multiple factors and is still facing a tough situation.”

Since the beginning of 2017, for example, Chinese companies borrowed $322 billion, or about 2 trillion yuan — a 154% increase from the previous year, according to data from China International Capital Corp.

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