Local Govts and SOEs Beating SMEs to Credit as Debt Growth Takes Off

Chinese officials and editorials are stepping up their rhetoric as evidence of renewed credit growth and banking troubles worry investors.

Caixin: China Sees Setback in Efforts to Keep Debt in Check
China’s overall leverage ratio, which measures outstanding debt in the real economy against nominal GDP, increased to 248.83% at the end of March, the highest in a data series going back to 1993. That’s according to a joint study released on Tuesday by two Beijing-based state-backed think tanks — the National Institution for Finance & Development (NIFD) and the Institute of Economics under the Chinese Academy of Social Sciences.
SOEs are driving credit growth as the economy slows and efforts to help SMEs fail again:
The report attributed most of the increase in leverage in the first-quarter to higher borrowing in the non-financial sector driven mainly by state-owned enterprises (SOEs). Their total debt rose by 15% year on year in the first quarter, far outpacing the 5.6% gain seen in the industrial sector overall which is dominated by private companies, the report said. At the end of March, SOEs accounted for 68.2% of all non-financial corporate debt, up from 66.9% at the end of 2018.
A microcosm of the failure to help private businesses from Caixin: China’s Biggest Private Broadband Provider Wants to Stop Providing Broadband
Dr. Peng is the largest private broadband provider — but doesn’t plan to be for long. As the company has seen its market share squeezed and its profits plummet, it is looking to transform itself from a network provider to a provider of services to the big state-owned networks — such as maintenance, installation and customer care.
Back to the debt story, local governments are borrowing like crazy too:
To support investment amid slowing economic growth, the central government has also taken a more relaxed stance toward borrowing by local government financing vehicles (LGFV), special companies set up by local governments to raise money to fund infrastructure. That contributed to a 300-billion-yuan bond-selling spree by LGFVs in the first quarter, compared with just 500 billion yuan raised in the whole of 2018.
Households aren't being left out:
The debt taken on by Chinese households is also increasing, with household leverage expressed as a percentage of nominal GDP rising to a record 54.3% in the first quarter from 53.2% at the end of 2018 and double the level at the end of 2010, NFID data show.

Li noted that if the household leverage ratio is calculated using disposable income rather than nominal GDP, it would be “very close” to the level seen in the U.S. before the 2008 financial crisis.
As credit worries and banking troubles emerge, Chinese editorials preach calm.

21st Century: 社论丨应对中国的金融稳定保持信心
Sogou: Editorial: Maintain Confidence in China's Financial Stability
Recently, due to the influence of trade friction, the RMB exchange rate has slightly depreciated, which is a normal market fluctuation. The current fluctuation of RMB exchange rate is mainly affected by trade war, which brings some uncertainties to the financial market, which is similar to what happened last year. However, unlike the reaction after the US first announced the tariff increase last year, this time China's capital market did not panic and the short-term fluctuation of RMB exchange rate was within normal flexibility. In an interview with the media, Guo Shuqing, chairman of the China Banking Regulatory Commission, warned that speculating against the renminbi would inevitably incur huge losses.

China's economy is in the stage of transition to high-quality development. Vigorously pushing forward the structural reform on the supply side will have a process of alternating the old and new momentum, thus inhibiting the growth of the old economy, and even some production capacity will be gradually cleared to prepare for a new round of high-quality development in the future. Looking at the whole world, China has been earnestly pushing forward structural reforms and will surely become the leader of the next round of global growth. At present, external pressure has become the driving force of China's reform, stimulating the enthusiasm and rigour of reform, which is conducive to improving the quality of reform and increasing market confidence.

At the same time, China has started structural reforms on the financial supply side since 2017, preventing financial risks by strengthening financial supervision and deleveraging. Over the past two years, high-risk assets have been reduced by 12 trillion yuan and systemic financial risks have been eliminated. It is precisely because of the financial reforms in the past two years that we are now confident when facing changes in the external environment. Despite the renewed trade war, China has not stopped pushing for structural reforms on the financial supply side. On the contrary, China has continued to take the initiative to deal with some risk points, such as the recent risk treatment of some commercial banks, which highlights the Chinese government's confidence in controlling the current situation.
The PBoC didn't create a deposit insurance corporation until the Baoshang Bank takeover. Reforms have stalled, one of the best sectors at the moment is real estate.
After the United States launched sanctions on trade and science and technology, public opinion thinks that financial sanctions may also be launched because the United States holds the power of the international financial system. However, we believe that the possibility of a US financial threat is very low.

The United States has a rich history and experience in using economic means (finance and trade) to achieve economic and political goals. It mainly carries out its activities by means of threats of financial sanctions and interference in capital flows. Now, if the United States launches financial sanctions against China, it will first harm itself. This is because the U.S. economy and capital market are at a high turning point. Any reckless move by the U.S. in finance will lead to the impact of its own capital market bubble.

The Federal Reserve has announced a moratorium on interest rate hikes early this year. If interest rate hikes are started again now, the US stock and bond markets may face turbulence. The possibility of the Federal Reserve raising interest rates is greatly reduced, which means that the pressure of RMB devaluation will be greatly reduced. Therefore, the United States has little room to intervene in liquidity through interest rate adjustment. In addition, after the Asian financial crisis, most emerging market countries have had experience and vigilance in dealing with the international liquidity crisis.
This is true, but it's not the main issue anymore. The dollar is a problem for China because of its domestic credit growth and its financial structure, which hasn't been reformed. Major reforms should have started after 2008.
As China still maintains effective capital controls, international speculative forces cannot take advantage of their experience and some tools to raid China. Their only leverage is the Hong Kong financial market. However, China experienced a financial war in 1998 and accumulated experience in fighting against the forces of shorting RMB in 2015 and 2018. China has huge foreign exchange reserves, rich experience, information advantages and sufficient policy tools. Any short-sighted force that wants to launch a financial war will seek its own doom.
That force is Nature, the invisible hand. China will not be broken by a single trader like Soros, it can only be broken by fundamental forces that no government can control.
In Japan's long-term process of dealing with the trade frictions between the United States, the reason why the phenomenon of "financial failure" finally appeared was mainly that Japan did not take the prevention of financial risks as an important policy objective from the beginning. Whether it was the sharp appreciation of the Japanese yen after the Plaza Accord or the subsequent dual monetary and fiscal stimulus, financial bubbles have accumulated. However, after the economic bubble burst, the Japanese government did not consciously prepare for the crisis in financial institutions and formulated a plan of treatment. Instead, it allowed the bureaucratic system to continue to muddle through, leaving the financial system terminally ill. Therefore, Japan's financial failure is mainly caused by its own lack of active defense and handling capacity, which is completely different from China's.
The bureaucratic system muddling through seems very much like China over the past 10 years. The real estate tax is delayed indefinitely. SMEs are losing out to SOEs in credit growth, as reported in the above article, even after yet another high-profile push. Only two weeks ago Caixing published: Banks Go to War to Meet Beijing’s Goal of Lowering Rates for Small Businesses. Rates may be coming down, but structural changes in the credit market and economy aren't happening.
At present, the situation in the United States limits the possibility of using financial means. Retail fell last month, investment growth stagnated and manufacturing growth fell to a nine-year low. The Federal Reserve is carefully stabilizing market expectations. Economic conditions make it difficult for the US dollar index to continue to rise and exert pressure on the RMB. In fact, the impact of the trade war in the United States is gradually emerging.

We need to overcome the group panic caused by trade frictions. Now the Chinese market is basically calm. In fact, China has enough policy tools to deal with the impact of trade war, which is an area where China is good at. Therefore, calm down, reform is still the main theme of China, and a series of structural reforms will inevitably release more market space and vitality as well as sustainable macro-economic growth.
The trade war is a convenient excuse for an economic downturn. In China's case (not the U.S.) it might prove to be the straw that breaks the camel's back, but it is not the source of trouble. Credit growth is the story.

Meanwhile on the renminbi, Yu Yongding says breaking USDCNY 7.00 isn't a big deal (and he's right, as long as there's no redline that raises the question of central bank omnipotence)
"We are totally scaring ourselves now. If the RMB exchange rate changes from 7 to 7.1, there will be no big problems in China. If the exchange rate is allowed to move around 7 now, there will be no big problem if everyone gets used to it. We should look at the change of exchange rate with a more natural and relaxed mind. 7, 7.1, 7.2 are not much different from 6.9 and 6.95. We should have confidence in China's economic development. " Yu Yongding said.
He also complained about China's capital controls: China’s capital outflow controls have gone to the ‘extreme’, former central bank adviser says
Yu Yongding, a senior research fellow at the Chinese Academy of Social Sciences, a state-owned think tank, told a financial forum in Beijing on Wednesday that he recently tried to exchange yuan to the value of US$20,000 at a bank and transfer the money out of China to pay for a trip to visit relatives living abroad.

But the bank refused to provide the service even though Yu, like all citizens under Chinese law, is allowed to make foreign transfers of up to US$50,000 each year. According to Yu, the bank refused to provide the service because he is over 65.

“I always support capital account controls, and I always encourage such measures. But sometimes we tend to be too extreme in doing things,” Yu was quoted as saying by Chinese news portal Sina.com. “Legal foreign exchange deals are being hindered.”

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