China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge.
Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive.
“Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,” he said, adding that a highly leveraged economy was more prone to macroeconomic risk.
Corporate debt in China has risen to about 160 per cent of GDP, while total debt is about 230 per cent, according to Financial Times estimates. The Bank for International Settlements warned this month that a steep rise in private and corporate debt in emerging market economies — “including the largest” — was “eerily reminiscent” of the pre-crisis financial boom in advanced economies.
Mr Zhou’s comments came at the end of a week of extraordinary dealmaking by Chinese companies overseas, with Anbang, the Chinese insurance company, bidding nearly $20bn for Starwood Hotels & Resorts and Strategic Hotels & Resorts.
Total outbound Chinese merger and acquisitions spending since January is over $100bn, according to figures from Dealogic. Data from 54 Chinese companies that did overseas deals last year show that many are “highly leveraged”, according to S&P Global Market Intelligence.
Chinese officials are concerned that the stability of China’s financial system could be threatened if Chinese companies are unable to repay a large amount of debt, which in turn can threaten economic growth. And as recent months have shown, instability in Chinese financial markets and risks to mainland economic growth rapidly feed through into global markets.
Earlier this month Moody’s warned it may downgrade China’s sovereign rating, a sign of increasing investor concern about the country’s rising debt and falling foreign exchange reserves.
Mr Zhou told the China Development Forum, attended by top government officials as well as foreign business chiefs including Facebook’s Mark Zuckerberg, that one way to tackle high leverage was to develop “robust capital markets” so that companies can increase equity financing and reduce reliance on debt.
Last week China’s chief banking regulator announced a move to try to tackle the country’s bad debt problem by opening the way for the country’s lenders to use debt-for-equity swaps to rid themselves of some of the $200bn of bad bank loans on their balance sheets.
Shang Fulin, chairman of the China Banking Regulatory Commission, raised the idea at the closing session of the annual meeting of parliament in Beijing.
The plan has been put forward as a way of tackling the trillions of renminbi of debt that have built up in the Chinese economy as a result of decades of debt-fuelled stimulus and easy credit.
Chinese banks’ bad debts stand at Rmb1.27tn, according to official figures, although some analysts believe the real number is many times higher.
About one-third of listed Chinese companies owe at least three times as much in debt as they own in assets, according to figures from Wind.
Also speaking at Sunday’s conference, Christine Lagarde, IMF managing director, said China was in the middle of a historic transition that was “good for China and good for the world.”
“The world will be watching closely to learn from China as it deftly manages the delicate balance between economic transformation and deeper global integration,” she said.
Additional reporting by Gabriel Wildau and Jackie Cai
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