China’s efforts to contain the risks from a surge in local-government debt may hurt growth in the world’s third-biggest economy, investment bank China International Capital Corp. said.
A report by the chief auditor last week indicated officials may take “relatively forceful measures” including strictly controlling new borrowing, CICC economists led by Hong Kong- based Ha Jiming said in a report today. The effect may be to “limit the source of funding for infrastructure projects and affect future economic growth.”
Chinese policy makers are grappling with the risks posed by the credit boom that fueled the nation’s comeback from the global recession. Fitch Ratings says lenders’ weakened financial positions as asset quality deteriorates could limit the nation’s ability to respond to any renewed global slump with more stimulus measures.
Next year, after the end of existing fiscal stimulus, “the funding of infrastructure projects will face greater pressure, so fixed-asset investment growth may decelerate and we can’t be optimistic about the outlook for the economy,” the CICC economists said.
Chinese banks may face a wave of bad loans from lending to local-government financing vehicles under the stimulus program begun in November 2008, Victor Shih, a political economist at Northwestern University, and Citigroup Inc. have warned separately.
Weakening Asset Quality
According to Fitch, lending so far may have limited the government’s options in the future.
A future deterioration in lenders’ asset quality is a “near-certainty,” Charlene Chu, a senior director in financial institutions ratings for Fitch in Beijing, told a conference in Hong Kong last week. “Chinese banks’ financial positions are more strained than it appears,” she said.
In an e-mail, she said that in the wake of last year’s record $1.4 trillion of lending, banks would be less able to engage in as large a stimulus as in 2008 and 2009. This could make any potential double-dip recession more protracted, she said.
The China Banking Regulatory Commission estimates that outstanding loans to funding vehicles set up by local governments rose 70 percent to 7.38 trillion yuan at the end of 2009 from a year earlier. In the first quarter of 2010, about 40 percent of new loans went to such entities, according to the CBRC. The vehicles are used because local governments can’t borrow directly.
China’s growth will decelerate to 9.3 percent in 2011 from 10.1 percent this year, according to the median forecasts in Bloomberg News surveys of economists. CICC didn’t give a forecast for next year’s growth.
In a “worst-case scenario,” the non-performing loans of local-government financing vehicles could reach 2.4 trillion yuan ($350 billion) by 2011, Citigroup said in March. Shih said separately that a crackdown on lending could lead to a “gigantic wave” of bad debts.
The CICC analysts said today that the borrowing won’t lead to a crisis for China for reasons including the government’s growing revenue, relatively low level of debt overall and large asset base.
Liu Jiayi, the nation’s chief auditor, indicated last week in a report to a standing committee of the National People’s Congress that some local governments’ debt burdens are excessive.
The official cited cases of debts amounting to more than 100 percent of local governments’ available fiscal resources in an audit of 18 provinces, 16 cities and 36 counties. In one case, the level is 365 percent, Liu said.
Officials must “strictly control” local government borrowing and prevent “the financial risk evolving into a fiscal one,” Liu said.
China’s gross domestic product grew 11.9 percent in the first quarter of 2010 from a year earlier, the fastest pace in almost three years. The risk that the nation could have a “hard landing” has been one of the biggest sources of anxiety for global investors this year, Tim Condon, a Singapore-based economist at ING Groep NV, said last week.
In November 2008, the government scrapped quotas that limited banks’ lending and pressed them to support a stimulus program devised to shield the economy from the effects of the global financial crisis. The result was a flood of cash.
Some of the money went into property, fueling speculation that contributed to record price gains, and some was channeled into the local-government financing vehicles.
China’s banking regulator said June 15 that it sees growing credit risks in the real-estate industry and warned of increasing pressure from non-performing loans. The State Council, China’s cabinet, this month ordered local governments to ensure repayment of debts by the financing vehicles and concentrate on completing projects already underway.