Rapid increase in indebtedness in China continues on many fronts

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/38

China’s booming credit growth shows no signs of abating. The stock of yuan loans grew 13 % y-o-y in August. With slowing corporate investment, households account for an ever larger share of borrowing, particularly in the form of housing loans. In June-August, the on-year growth in household loan stock averaged 20 %, while the stock of loans granted to firms and government administrations grew 9 %. Three-quarters of new loans issued in June-August went to households, mainly in the form of housing loans. In the first eight months of this year, sales of apartments, measured in terms of liveable floorspace, rose 26 % y-o-y. Average apartment prices in urban areas were up 14 % y-o-y in August.

In response to concerns over rising indebtedness and capital outflows, the PBoC has refrained from further broad-based monetary easing. Given the rapid slowdown in fixed investment, there is, however, increased pressures for more policy stimulus. The central bank has continued to dole out targeted loan support. For example, the stock of MLF (medium-term lending facility) loans to designated commercial banks (sometimes for a set purpose), has risen this year to over 1 trillion yuan (€130 billion). The central bank has also lent nearly 800 billion yuan this year to three state policy banks (China Development Bank, Export-Import Bank and Agricultural Development Bank) under the PSL (pledged supplementary lending) programme.

China’s policy banks have also issued bonds worth over 2.5 trillion yuan in January-August. Bloomberg reports that policy banks this year have raised over 2 trillion yuan (€270 billion, 3 % of GDP) in new funding to be used to finance designated projects. The lending programme is also expected to have a multiplier effect as firms may use their granted credit as collateral for new loans or deposit part of the money temporarily in commercial banks. At the end of August, the total assets of policy banks amounted to 10 % of total banking sector assets.

International institutions have regularly expressed concern over China’s rapid growth of indebtedness. Last week the Bank for International Settlements (BIS) took up the matter in their quarterly report. BIS said that China’s debt-to-GDP ratio in March departed 30 % from the long-term trend, which it uses as an indicator of risk levels. The distortion is higher than in any other country and widely seen as a signal of an impending banking crisis. Historical data show that even a departure of 10 % from the long-term trend suggests a high likelihood of a banking crisis within three years. BIS figures put China’s debt-to-GDP ratio at the end of March at 255 %. The reality of risks associated with Chinese corporate debt hit home again this week as the first Chinese firm issuing bonds on the interbank market (state-owned Guangxi Nonferrous Metals Group) filed for bankruptcy.

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