Photographer: Tomohiro Ohsumi/Bloomberg

Pimco Sees China Refraining From Broad-Based Deleveraging

Updated on
  • Total borrowing to grow faster than nominal GDP: Luke Spajic
  • Spajic speaks at New Renminbi Reality conference in Singapore

China’s deleveraging campaign will create pockets of pain in markets over the coming year, without curtailing borrowing to the extent that debt actually declines, according to Pimco.

Pacific Investment Management Co. predicts that Chinese companies will be able to refinance most of their borrowings in the next 12 months as the authorities refrain from carrying out broad-based deleveraging. This will contribute to debt expanding faster than nominal gross domestic product, said Luke Spajic, head of portfolio management for emerging Asia at Pimco, which manages $1.7 trillion.

“The overarching issue is that we don’t envisage a drop in the debt stock," Singapore-based Spajic said in a phone interview. "In general, this market is domestically funded -- so as long as China avoids a sharp economic slowdown over the next few years, then in all likelihood, this debt should all or in general be rolled over quite comfortably."

His views come amid a concentrated deleveraging campaign in the world’s second-largest economy, with officials including the People’s Bank of China governor signaling that the drive will deepen. Still, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan ($274 billion) in September. China’s corporate debt surged to 159 percent of the economy in 2016, compared with 104 percent 10 years ago, while overall borrowing climbed to 260 percent.

Read more about China’s deleveraging drive here.

Spajic, who also spoke at The New Renminbi Reality Summit organized by Bloomberg Live in Singapore on Tuesday, said it isn’t unusual for China’s borrowing costs to climb at a time when global central banks are tightening. Some parts of the economy may face “credit deterioration,” he said, adding that China may raise interest rates to keep borrowing costs elevated, maintain tight capital controls and add more restrictions on the housing market.

China is having a “story of debt growth,” Spajic said at the RMB Reality conference, adding that tightening by the authorities is beginning to bite. The nation will have to allow capital flow in and out over time in a multiple-year process, he said. Other speakers on the same panel were Neeraj Seth, managing director and head of Asian credit at BlackRock Inc., Jeffrey Chi, vice chairman of Vickers Venture Partners in Singapore, and Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Ltd.

In a speech kicking off the 19th Party Congress last week, President Xi Jinping said China will continue to strengthen financial regulation and defend against systemic risk. He reiterated that housing is for living in, not speculation.

Here are some of Spajic’s comments on Chinese companies in the coming year:

  • Some companies in sectors such as property, metals and mining -- and also smaller banks with businesses in riskier wealth management products -- could be left behind in the environment of higher borrowing costs and may even default
  • Pimco is overweight on state-owned enterprises with good credit ratings, as they still offer some value due to the prospects of further consolidation
  • The fund manager is underweight on provincial state-run firms, investment-grade property developers and financial companies

— With assistance by Tian Chen

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