Monday, May 9, 2016

China debt-fuelled growth increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis

China debt-fuelled growth increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis

A People’s Daily article published yesterday showed that China’s leadership is trying to make a grand shift in the nation’s economic policies in a bid to say goodbye to debt ­fuelled growth. In a sign of distaste for the credit-pumped growth in the past couple of months, the Communist Party mouthpiece cited an unidentified “authoritative” figure as saying that boosting growth by increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis.

Economic growth was set to enter a so-called L-shaped trajectory for a few years and it was unrealistic to expect any rebound in the world’s second largest economy, according to the article.

“It’s a policy stance statement that China will stop its practices in the first quarter of bolstering growth by credit injection,” Tao Dong, chief economist for non­Japan Asia at Credit Suisse in Hong Kong, said.

“It’s clear-minded to see high leverage as a source of risks, and I applaud such a statement.”

The publication of the 11,000-character article comes after the mainland pumped an unprecedented amount of credit into the economy in the first quarter to help growth, triggering price gains in properties and commodities and putting strategic goals such as economic restructuring on the back burner.

After a strong rebound in the first quarter, “everyone thought, ‘well, it’s not possible to continue like this’,” Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, said.

“We are waiting for policy signals [of change], and this is probably one of the signals.”

The article, in the form of a question and answer format, repudiated many of the economic policies pursued by the State Council under Premier Li Keqiang, including propping up stock prices to address a slowdown in growth and boost the leverage ratio to keep expansion on track.

“It’s almost a public criticism of what the State Council has been doing,” Jonathan Fenby, managing director of the China team at Trusted Sources consultancy in London, said.

The unnamed figure, Fenby said, “must come from the party’s leading group on economic and financial affairs, and my guess is it was Liu He or any of those who are close to [President] Xi Jinping”.

Xi chairs the leading group with Li as deputy, while Liu, one of Xi’s top economic aides, runs the group’s daily operations.

“The People’s Daily article ­included many statements that are conflicting with Beijing’s own words and stances in the past, and it’s tempting to ask which authoritative figure can command more authority than China’s vice-premier in charge of economic affairs?” Shen Jianguang, chief economist at Mizuho Securities Asia in Hong Kong, said. “It reflects the lack of consensus among China’s top economic policymakers.”

It was the third time the “authoritative” source had been quoted in a People’s Daily article.

Despite the interviewee not being identified, the article occupied a third of the front page and the whole second page of the newspaper in a strong indication the figure was a person of stature.

“It’s also a stern warning from the top leadership to speculators,” Zhou Hao, an economist with Commerzbank in Singapore, said.

“Policies have eased a bit, and people are already starting to speculate in steel rebar futures and in property … that’s absolutely not tolerable for the leaders when their big goals are to reduce capacity and inventory.”


At the same time, the article also carried comments that run counter to previous statements.

Rather than celebrate the “good start” to 2016, the authoritative source said deep-rooted problems in China’s economy had not eased and it was “hard to use simplified concepts such as ‘good start’ to describe” the country’s economic situation.

China must show determination to implement structural reforms and any signs of preference for the old way of relying on stimulus to drive growth would only leave the market “worried, hesitant and confused”.

While the views included in the article may have economic grounding, the potent wording and attacks against some policies are causing unease.

Shanghai’s stock market plunged 2.8 per cent yesterday.

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