China deleveraging is dead as USD34 trillion debt boom returns

For almost two years, the question has lingered over China’s market-roiling crackdown on financial leverage: How much pain can the country’s policy makers stomach?

Evidence is mounting that their limit has been reached. From bank loans to trust-product issuance to margin-trading accounts at stock brokerages, leverage in China is rising nearly everywhere you look.

While seasonal effects explain some of the gains, analysts say the trend has staying power as authorities shift their focus from containing the nation’s USD34 trillion debt pile to shoring up the weakest economic expansion since 2009. The government’s evolving stance was underscored by President Xi Jinping’s call for stable growth late last week.

“Deleveraging is dead,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong.

The question now is whether China’s attempt to create a healthier mix of financing – fewer shadow banks, longer debt maturities – will prove successful. Premier Li Keqiang highlighted the challenge last week, warning of risks from sharp increases in short-term debt after China’s credit growth surged to a record in January.

“Chinese regulators are now trying to walk a fine line by allowing credit to flow back into the private sector without returning to the old pattern of rapid and unsustainable credit growth,” said Nicholas Borst, a China research director at Seafarer Capital Partners LLC in Larkspur, California.

Even after accounting for seasonal distortions, China’s leverage indicators have been surprisingly strong in 2019:

  New yuan loans jumped by a record 3.23 trillion yuan in January, exceeding estimates

  Shadow financing rose for the first time in 11 months; interbank borrowing climbed to a six-month high

More than 1,800 new trust products have been sold so far this year, the fastest start since at least 2008

Banks issued 22 percent more wealth-management products in January than the year-earlier period, according to PY Standard

Margin debt in China’s stock market surged over the past two weeks at the fastest pace since 2015

It’s a stark turnaround after a nearly two-year anti-leverage drive that sank Chinese stocks, restrained economic growth, triggered record bond defaults, and pummeled the nation’s gargantuan shadow-banking industry.

Xi signaled a greater emphasis on growth at a meeting of the Communist Party’s elite 25-member Politburo on Friday, saying that healthy economic development is the foundation for risk prevention. A statement released after the meeting said “risk prevention should be done on the basis of stable growth.” Previous statements cited the need “to balance efforts to stabilize growth, restructure the economy and prevent risks.”

In another sign of the government’s evolving stance, a quarterly policy report published by the People’s Bank of China last week watered down language on the campaign to curb excess credit, removing a reference to deleveraging and adding wording on “stabilizing the macro leverage ratio.”

“China has shelved deleveraging activities almost entirely to support the economy,” said Iris Pang, a Hong Kong-based economist at ING Bank NV.

The PBOC and the China Banking and Insurance Regulatory Commission didn’t respond to faxed requests for comment.

China’s overall leverage ratio stood at 243.7 percent at the end of 2018, with corporate debt reaching 154 percent, household borrowings at 53 percent and government leverage at 37 percent, according to Zhang Xiaojing, deputy head of the Institute of Economics at the Chinese Academy of Social Sciences. Before that, the nation’s leverage ratio climbed at an average 12 percentage points each year between 2008 and 2016.

China’s total debt will rise relative to gross domestic product this year, after a flat 2017 and a decline in 2018, Wang Tao, head of China economic research at UBS Group AG in Hong Kong, predicted in a report this month.

While Wang cautioned that “re-leveraging” may increase concerns about China’s commitment to ensuring financial stability, investors have so far cheered the prospect of easier credit conditions.

Yields on lower-rated Chinese corporate bonds have dropped in 2019 and the nation’s stock market – one of the world’s worst performers last year – has soared (thanks also to signs of progress in trade negotiations with the U.S.). The small-cap ChiNext Index entered a bull market on Friday, while Chinese shares surged across the board yesterday.

“In 2018, it was the double whammy from the deleveraging campaign and the trade war,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “In 2019, it could be the interplay between softening growth and more supportive policy.” Bloomberg