One of the West’s leading experts on China’s banking system says that Beijing has demonstrated a surprising willingness to endure short-term pain in order to shore up its financial system.
While former Fitch analyst Charlene Chu established her reputation by warning of the severe threat that China’s immense debt load poses to its financial system, she now says that Beijing is willing to swallow the bitter medicine needed to ensure the country’s long-term economic health.
Speaking to Bloomberg Chu, senior partner at Autonomous Research, pointed to a “willingness to do what needs to be done in the interest of long-term stability,” which could in turn translate to “more pain and more surprise than the market has been assuming this year.”
According to Chu Beijing is showing far greater “tolerance for pain” than it has in the past when it comes to reining in China’s shadow banking sector, by clamping down on both wealth management products and negotiable certificates of deposit simultaneously, and preventing banks from using growth in one to compensate for deceleration in the other.
“Usually, they back down,” said Chu. “They’re not backing down.”
As a consequence PBOC has thwarted the expectations of analysts and “pushed the financial system to the point that it needs life support,” while Beijing can expert to suffer far greater losses than they have thus far when it comes to non-performing loans.
When it comes to the ongoing deleveraging campaign launched by China’s financial regulators, Chu said that use of the term “deleveraging” is disingenuous, as neither the ratio of credit to GDP nor the nominal amount of credit outstanding is contracting.
China is instead dialling back the clip of credit growth relative to GDP growth, making 2017 the first year in a while that the numerator isn’t outpacing denominator two or three-fold.
Autonomous estimates that China’s total social financing increased 30 trillion yuan in 2016, and will rise by 26 – 27 trillion yuan in 2017,.
Credit growth will still exceed nominal GDP growth this year, rising by 13 – 14% and 10% respectively, pushing the ratio of credit to GDP higher.
Chu supports the recent Moody’s downgrade on the grounds of a sizeable and rapid increase in corporate leverage that is rare for any any country, and serves to weaken China’s creditworthiness.
She does not see China successfully transitioning from its older investment-driven economy towards a new, more consumption-driven model within the next several years, and believes that such a shift could take anywhere between five years to a decade.