China's Credit Risk Is Manageable as Outflows Slow, Goldman Says

  • Capital outflows more than halved to $36 billion in February
  • Goldman expects NPL rate rise to 8%-9% in `a long cycle'

China’s debt problems are manageable as a largely closed financial system provides some cushion and capital outflows have slowed, according to Goldman Sachs Group Inc.

Foreign-currency debt is not a significant issue because Chinese companies have cut their net borrowing to $793 billion as of June, equivalent to only a quarter of the country’s foreign reserves, Hong Kong-based analyst Kenneth Ho wrote in a note on Monday. Capital outflows slowed to $36 billion in February, compared with $88 billion the previous month, according to Ho’s estimates.

“We think near-term credit risks in China are manageable, but medium-term challenges remain,” Ho said. “Policymakers’ ability to handle credit issues are high, given that the near term risks on capital outflows, at least for now, appear to have receded.”

Chinese officials warned about the risk of a surge in leverage over the weekend, saying the government would do what it must to avoid turmoil in stocks, the currency, bonds and property. Moody’s Investors Service lowered China’s credit-rating outlook to negative from stable earlier this month, citing the country’s surging debt burden while questioning the government’s ability to enact reforms.

Ho said he agrees with Moody’s assessment that the erosion of China’s financial buffer is most likely to be gradual because the country’s monetary system is mostly isolated from the rest of the world.

Bad Loans

Bad loans will increase only gradually because the government has put the need to support economic growth above the efforts for “credit re-balancing,” the analyst said. Goldman Sachs raised its estimate of potential non-performing loans in the banking sector to about 8 percent to 9 percent, from the previous prediction of between 4 percent and 6 percent. That compared with the official figure of 1.7 percent at the end of 2015.

The loosening of mortgage restrictions in recent months is worth monitoring as it may fuel property bubbles in large cities, but affordability and moderate leverage suggest the risk is not imminent, Goldman Sachs said.

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