Chinese broad credit growth boomed in December, adding to concerns about piling debt even as the data eased worries that the slowing economy was denting loan demand.
Debt has fuelled much of China’s growth, be it investment-led economic growth or the once surging stock market. But that has created a Rmb152tn ($23tn) total debt pile, or 231 per cent of gross domestic product, a damoclean sword hanging over the country as it grows at its slowest pace in a quarter of a century.
New borrowing — including bank loans, bonds and off-balance sheet lending — totalled Rmb1.7tn ($260bn) last month, according to the central bank’s broadest gauge of credit flows to the real economy.
That is the biggest increase since January, as borrowers rushed in to take advantage of a series of interest-rate cuts and cash injections, much as US Federal Reserve easing fuelled loan growth in the US in recent years.
Corporate bonds set a monthly record, with net issuance of Rmb470bn, on the back of buoyant liquidity and falling interest rates. Equity financing was also the strongest on record at Rmb153bn in December, as regulators unfroze initial public offerings late last year amid a recovery in the stock market that has since foundered.
Zhou Hao, Asia economist at Commerzbank in Singapore, said commercial banks have few incentives to provide loans directly to corporates, especially given credit concerns at small and medium-sized enterprises, and are turning instead to capital markets to finance them indirectly.
“This hints at an ongoing structural change in China’s financing system,” he added.
In a bid to boost the economy, China’s central bank cut interest rates five times last year and pumped about Rmb2.5tn into the banking system through cuts to the required reserve ratio.
But there are signs now that companies, saddled with big debts and facing weak demand, are reluctant to borrow at any price.
The latest figures allay those concerns to some extent, but they will renew countervailing worries that China is stimulating short-term growth at the cost of piling on more debt, exacerbating financial risks.
Analysts say the central bank is in a difficult position because monetary tightening aimed at restraining new debt accumulation would likely worsen deflationary pressures already afflicting the economy.
Deflation not only hampers growth but also increases the real debt burden — something Japan knows well. Debt principal is fixed in nominal terms so even if loan volumes slide the economy could still end up with a heavier real debt burden if prices fall quickly.
For the full year, broad credit to the real economy rose Rmb14.1tn, down from Rmb15.5tn in 2014, according to central bank figures, suggesting some deleveraging. But credit figures were distorted this year by the finance ministry’s initiative to swap Rmb3.2tn worth of loans to local governments into municipal bonds, an effort designed to lower financing costs for cash-strapped localities.
Government bonds are not counted in the broad credit figures, but loans to Chinese provinces and cities were counted in previous years because such lending flowed to special-purpose vehicles used by localities to skirt a now-rescinded ban on direct borrowing. That means Rmb3.2tn disappeared from the broad credit gauge in 2015 as bank loans to the local SPVs were retired, but the debt itself remains outstanding in the form of newly issued municipal bonds.
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