Global investors need to be cautious when reading the headlines out of China over the weekend. News that People's Bank Governor Zhou Xiaochuan is worried about lending as a share of gross domestic product could be interpreted as a sign the nation will start to address corporate leverage, which according to the Bank for International Settlements is equivalent to 166 percent of the economy. Put in context, that intention seems doubtful.
If anything, China looks keen to shift the risk away from bank balance sheets and onto capital markets.
One plan being mooted, for example, is the creation of a credit-default swap market, which would allow investors to short bonds domestically instead of focusing solely on equities. Such a move would add liquidity just as foreign investors are being allowed to enter more freely and government debt is on the cusp of being included in global indexes. The arrival of international cash is likely to put downward pressure on yields, and in turn, prompt even more companies to sell notes.
Businesses in China have already been doing that at a record pace, and there's now almost 23 trillion yuan ($3.5 trillion) of securities outstanding:
While that truckload of issuance hasn't completely replaced bank lending, growth has clearly shifted to the capital markets.
Meanwhile, plans to sell bonds backed by nonperforming loans are progressing apace. Asset-backed securities are one of China's hottest financial fads. Since they were permitted again in 2013, some 712 billion yuan have been sold. One favorite is collateralized loan obligations (remember them?), which repackage corporate borrowings into new securities that are then excluded from bank's balance sheets.
As for shares, short-selling continues and margin lending, the form of leverage that when restricted sent the Shanghai and Shenzhen exchanges into a tailspin last year, is about to make a comeback. China Securities Finance Corp., the state-backed agency that provides funding to brokerages for margin trading, will restart offering loans to securities firms for periods ranging from seven to 182 days, according to a statement posted on its website Friday. In essence, Beijing wants more people betting on stocks, even if they have to borrow to do so.
It's why investors should take the central bank's complaining about leverage with a grain of salt. The grumbling doesn't mean they want to necessarily curb it, just shift some of it out of the financial system and onto your portfolio.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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