How China Is Getting Serious About Financial RiskBloomberg News
China is getting real about dangers in its financial system. While de-risking has been the government’s mantra since 2015, the country’s most powerful politicians have been ramping up directives on everything from excessive borrowing to stock-market speculation. Those efforts have gained momentum since October’s Communist Party Congress, where leaders pledged to make controlling financial risk a top priority. Their challenge is to do so without derailing the economy.
1. Does China really want less debt?
No, so far. Beijing seems to prefer slowing debt growth to actually cutting the overall stock. Top leaders said in December they will prevent systemic risk, omitting a "deleveraging" pledge from prior years. The government said in 2016 it would "control" overall debt and "reduce" corporate borrowing. In January, top bank regulator Guo Shuqing told state-run People’s Daily there’s a need to "dismantle" the shadow banking sector and "suppress" household leverage.
2. Why is this time different?
President Xi Jinping chaired a gathering to discuss “safeguarding national financial-market security” in April 2017, after Shanghai stocks tumbled. The meeting was attended by members of the 25-person Politburo. While the central bank governor and top regulators were also there, the fact the Communist Party’s premier decision-making body met and decided to act on financial risk suggests there’s consensus at the very top. In a sign that the nation is broadening its deleveraging push to the real economy, Xi told a meeting of top regulators in July that curbing state-owned enterprise borrowing should be the "the priority of priorities" and that officials must be held accountable "for a lifetime" if they take on too much regional debt.
3. How serious is the threat?
China’s central bank governor, Zhou Xiaochuan, has pointed to a buildup of risks that are “hidden, complex, sudden, contagious and hazardous.” By the end of 2016, total borrowing had ballooned to about 260 percent of the size of the economy, up from 162 percent in 2008. China accumulated its record debt pile after the global financial crisis, when it pumped credit into the economy, seeking to avoid the economic slumps that ravaged the U.S. and Europe. Pessimists say the risks to financial stability are mounting. Kyle Bass, founder of Hayman Capital Management, has persistently warned of a looming crisis. Jim Chanos, the hedge fund manager who predicted the collapse of Enron Corp., has said Chinese banks are showing signs of loan stress. The International Monetary Fund warned that China might eventually suffer a “sharp adjustment” unless it addresses its indebtedness. And both S&P Global Ratings and Moody’s Investors Service cut China’s sovereign credit rating in 2017 for the first time during the current millennium, citing debt risk.
4. What do the optimists say?
They argue that the authorities would bail out distressed lenders before any crisis threatens the financial system. Failed banks might even be dealt with quietly before anyone outside China knew, according to former China Minsheng Banking Corp. Director James Stent. Some argue there’s little chance of a financial meltdown because the biggest slice of China’s debt pile is carried by state-owned enterprises. In the worst case, the government could take over some liabilities and sell them to distressed debt operators, said Huang Xiaoguang, Australia and New Zealand Banking Group Ltd.’s top banker in China.
6. How much of China’s leverage is in the shadows?
One of the main concerns is that much of the financial action takes place beyond the reach of regulators. China’s shadow banking sector -- unregulated credit mostly -- is hard to quantify with any precision, but many analysts agree it has the potential to put the financial system at risk. The sector has ballooned in recent years partly due to the proliferation of wealth management products, hugely popular investments that offer superior yields to traditional bank deposits as well as implicit guarantees from the banks. The combined outstanding volume of trust lending, entrusted loans and banks’ acceptances -- three categories of shadow bank assets -- surged by 3.57 trillion yuan to 27.8 trillion yuan last year, according to calculations by Bloomberg Economics based on data released by the People’s Bank of China.
7. What has been achieved?
The broad money supply as a percentage of GDP fell last year for the first time since 2011, growth in the outstanding volume of wealth management products slowed, and the net issuance of short-term bank debt shrank for the first time in four years in 2017. The market was spooked by tougher regulation as well, sending the yield on the benchmark 10-year government bonds surging.
8. How are companies feeling the pain?
China’s largest conglomerates are under growing pressure to slim down debt. Billionaire Wang Jianlin, whose group controls AMC Entertainment Holdings Inc. and was once China’s richest man, is retreating from ambitions to build an entertainment empire to rival Walt Disney Co. Then there’s HNA Group Co.: the indebted aviation-to-hotels conglomerate told creditors it will seek to sell about 100 billion yuan in assets in the first half of the year to repay debt and stave off a liquidity crunch, people familiar with the matter said in January. In its boldest move yet, the government temporarily put its insurance regulator in charge of Anbang Insurance Group Co. -- the former serial acquirer that gained fame through its purchase of New York’s Waldorf Astoria hotel. Anbang’s founder faces prosecution.
9. What have regulators done?
- August 2016-present: The People’s Bank of China starts offering funds to banks at longer tenors and boosting money-market rates as a way of deterring companies from borrowing.
- March 2017: The banking regulator asks lenders to submit reports on entrusted investments -- funds that Chinese banks farm out to external asset managers.
- April 10, 2017: The China Banking Regulatory Commission issues guidelines on stepping up risk control in the banking industry, requiring lenders to ensure stable asset quality, improve liquidity risk management, strengthen their bond and investment businesses and improve interbank operations.
- July 15, 2017: President Xi says the central bank will play a stronger role in defending against risks and safeguard the financial system. China will set up a commission under the State Council to oversee financial stability and development, according to Xinhua.
- Aug. 31, 2017: The PBOC bars financial institutions from issuing negotiable certificates of deposit with maturities longer than one year. NCDs, introduced in 2013 to help smaller lenders compete with big state banks for funding, have morphed into a way for banks to fund purchases of each other’s debt.
- Sept. 30, 2017: The PBOC announces rewards for banks -- in the form of reduced reserve requirements -- if they lend to small business and rural borrowers. It’s seen as a direct challenge to the shadow banking industry. Citic Securities Co. estimates the move could free up about 600 billion yuan in new lending.
- Nov. 17, 2017: Sweeping rules are proposed to curb risks on shadow banking products, partly aimed at breaking an implicit government guarantee that’s driven investment into WMPs. The regulations, set to take effect in 2019 after a consultation period, mark a “new era” in Chinese financial supervision, according to Citic Securities Co.
- Jan. 4, 2018: Market participants should “reasonably" control leverage in their bond trading, according to rule posted on PBOC website.
- Jan. 5, 2018: Insurers should not guarantee investment returns or provide fixed returns when setting up equity investment schemes, the insurance regulator said.
- Jan. 6, 2018: Banks must strictly separate entrusted loans made for clients from their proprietary operations and can’t get involved in lending decisions or offer guarantees, under rules issued by the banking regulator.
- Feb. 23, 2018: Insurance regulator to run Anbang for a year. Founder Wu Xiaohui to be prosecuted for "economic crimes."
The Reference Shelf
- China’s shadow banks may show more cracks as regulators toughen rules
- Shadow banking risks are easing as stricter regulations damp growth in wealth management products: Bloomberg Intelligence
- Analyst Charlene Chu says China needs to do more
- A QuickTake explainer on China’s ticking debt bomb
- UBS notes the concentration of shadow loans in one particular province
- QuickTake Q&As on China’s entrusted bonds and WMPs
- Chinese think the government will bail out the WMP sector
- Ex-finance minister says local governments should be allowed to default.
- The Chinese government’s English portal
— With assistance by Tian Chen, Angus Whitley, Dingmin Zhang, Jun Luo, and Grant Clark