Standard & Poor’s Questions Whether China’s Deleveraging Can Tame Financial Risk


China’s ongoing deleverage campaign confronts “significant obstacles” as a result of conflicting policy imperatives, according to a new report from Standard & Poor’s.

In a report released on Monday Standard &Poor’s said that while Chinese regulators had adopted concerted measures to deleverage the economy, their efforts could be undermined by the need to boost credit in order to maintain rapid economic growth, as well as keep the country’s huge state-owned sector afloat.

“The obstacles to bringing down financial risks in the country remain significant,” wrote analysts Kim Eng Tan and Qiang Liao. “Whether the Chinese government can stabilise overall financial risks is still uncertain.”

While regulators have launched a concerted deleveraging campaign over the past year to address the mountain of debt accumulated by years of post-GFC stimulus, the analysts note that the results of these measures could be unwound to prop up flagging growth.

“If, for any reason, China’s economic growth, threatens to come in significantly below target, it is possible that policymakers will ease credit constraints significantly again,” said the report.

Standard and Poor’s further notes that the dependence of both China’s local governments and state-owned enterprises on access to credit could impede ongoing deleveraging efforts.

Local government is still incentivised to boost growth with credit in order to prevent a “rise in non-performing loans in their jurisdiction,” while state-owned enterprises continue to enjoy easier access to funds due to implicit government backing, leaving them with a 70% share of corporate debt which squeezes the supply of capital to the more vigorous and efficient private sector.

Standard & Poor’s has maintained its sovereign rating for China, as well as “negative” outlook for credit worthiness.

Other analysts concur broadly with the view of Standard and Poor’s, with Raymond Yeung, ANZ’s chief economist for Greater China, telling the South China Morning Post that the country “still relies on credit expansion” and planning to achieve key policy goals.

“Government planning still exists in the banking and economic system, as shown in growth targets of gross domestic product, M2 and aggregate supply,” said Yeung.