China’s credit expansion and the deleveraging challenge
On April 3, 2014, Stephen Green, the head of research for Greater China of Standard Chartered Bank, gave a speech titled with “China’s credit expansion and the deleveraging challenge” in the sixth installment of “Hongru Forum in 2014”. Under the wild credit expansion in China, Stephen carried out deep analysis for channels and structures of the increase of China’s credit, and discussed how China should take the deleveraging challenge.
Through the credit increase during 2002-2013, Stephen indicated that after the 4 trillion stimulation policy in 2008, the growth rate of China’s credit exceeds 30%, increasing rapidly far beyond the former speed. At the same time, the proportion of credit occupying GDP increases from 150% in 2008 to 230% in 2013. As a comparison, the GDP increase of China is only a little more than 10%.
Then, what about the channels for the rapidly increasing credit in China? Stephen believed that they are mainly due to the increase of wealth management products (WMPs) and trust: .
WMPs began to increase in 2009 with very low base and the annual growth rate of 60%, and by the end of 2013, they had reached the amount of 10 trillion. In the mean time, deposits grow very slowly. For the increase of trust funds, Stephen’s research estimated they grow from 2 trillion yuan in March of 2010 to the astonishing 10 trillion yuan in September of 2013.
Secondly, what about the credit structures? For WMPs, Stephen thought that 50%-60% of them are placed in the inter-bank market, and risks of this part are very low; only 20-30% of the funds are lent out to local government investment vehicles (LGIVs) with high risks and much less-liquidity. The investment structure of trust is totally different with that of the WMPs. Stephen pointed out that 80-90% of the trust funds have been put into the real estate and LGIVs where risks are rather high. Moreover, with loan terms of 1-3 years, there are great maturity mismatch risks of these trust funds.
Analyzed the outstanding credit by sector, Stephen pointed out that the credit leverage of the government and enterprises are the highest, and the one of household is relatively very low. According to the data provided by Standard Chartered, the proportion of household credit occupying GDP is always lower than 0.3% from 2002 to 2013, but the proportion of enterprises occupies above 1% and rapidly increased to 1.5% in 2013. The government credit occupying GDP rose from around 0.25% in 2002 to around 0.5% in 2013.
China’s credit has increased with the growth of over 20% for a long time, especially when China’s economy growth rate drops to around 8% now, the last year’s credit expanded as the same. Given China’s economic growth would be no more than 8%, Stephen stressed China should meet the credit deleverage challenge in the near future.
Then, how should China successfully deleverage? Stephen believed that:
There should be some bankruptcies and write-offs of bad debts. To solve soft-budget constraints, this may involve bank recapitalisation at a later stage (most needed in the lower-tier banks).
Most importantly, real supply-side reforms which boost the efficiency of investment and raise productivity growth should be carried out. For example, open up key service sectors to private investment, simplify and clean up the bureaucracy, force SOEs to improve their efficiency by selling non-strategic assets, etc.
Though it is rather difficult, we should take more tolerance to inflation: over a 10 year period, 5-6% inflation is likely to be needed. Of course, it is rather difficult for government to bear it.
With a supportive global growth environment, China should use currency depreciation to boost exports. At present, twin surpluses suggest CNY is still mildly undervalued.
Liu Haiying, Investment Director of Guangdong Rising Assets & Investment Management Center, Shi Lei, Executive General Manager of the Fixed Income Department of Ping An Securities, and Dr. Shi Hao from Antai College of Economic Management, Shanghai Jiao Tong University, made their comments at the seminar. Also, they discussed such topics as whether a wide-range bankruptcies exist in the Chinese market, the relationship between deleverage and inflation, and the structural influences of deleverage on the real economy etc.
“Hongru Forum” is a public seminar jointly launched by Liu Hongru Financial Education Foundation and SIFL Institute, and is held regularly once in two weeks. The seminar pays attention to various issues in China’s finance and macro-economy, and devotes itself to building a platform for cross boundary exchanges among excellent scholars, government and market institutions.
Since August 2013, “Hongru Forum” has gained the exclusive support of Chang’An International Trust Co., Ltd.
