By Yawen Chen and Se Young Lee
BEIJING (Reuters) – China has met its target for reducing debt levels but will keep cracking down on riskier types of financing to contain risks to its financial system, the banking and insurance regulator said on Monday, urging banks to step up lending to smaller companies.
The comments came as worries about China’s debt are on the rise again as Beijing ramps up efforts to support the slowing economy. New bank loans hit a record in January despite rising bad loans and record defaults in 2018.
Though top officials have repeatedly pledged not to resort to another massive spending spree like that during the global financial crisis, analysts say it is vital for policymakers to revive weak credit growth to avoid a sharper slowdown.
“After two years of work, various financial disorders have been effectively curbed,” Wang Zhaoxing, vice chairman of China Banking and Insurance Regulatory Commission (CBIRC), told a news conference.
“This breaks overseas predictions that the ‘barbaric’ growth of shadow banking and the financial overheating of real estate might lead to systemic financial risks and crises in China.”
China has never revealed a specific target for its multi-year risk containment campaign and does not release comprehensive statistics on debt loads.
But documents provided by the regulator said the leverage level in the economy stabilized in 2018, meeting the target, after growing by an average of more than 10 percent a year.
“Our leverage level is basically stable. This is a marvelous achievement,” said Zhou Liang, another CBIRC vice chairman.
Authorities have been trying since the last downturn in 2015 to clamp down on riskier types of financing and an explosive build-up in debt which international monitors like the International Monetary Fund say could trigger a banking crisis in the world’s second-largest economy.
But the intensifying regulatory pressure started to drive up borrowing costs last year and make it more difficult for smaller firms to secure funding, dragging on business activity and prompting policymakers to shift their focus back to growth boosting measures.
Analysts worry that any halt to China’s financial risk campaign may also delay much-needed structural reforms, such as allowing market forces to dictate a more efficient use of capital.
Corporate bond defaults hit a record last year, while banks’ non-performing loan ratio hit a 10-year high, but authorities have kept pressure on largely state-owned, banks to keep lending to cash-strapped companies facing “temporary” difficulties.
The regulator said in a statement on Monday that it had ordered all of the country’s banks to sharply increase lending to private companies, with big state-owned banks told to increase loans to smaller firms by more than 30 percent.
The private sector accounts for over half of China’s economic growth and most of its new jobs, but firms have been facing higher borrowing costs and a tougher time obtaining financing due to a regulatory crackdown on shadow banking.
Chinese banks also believe smaller firms carry higher credit risks and prefer lending to state-backed companies.
The regulator said banks will now be prohibited from discriminatory practices when approving loans for private firms.
To crack down on “rampant and blind” expansion of financial institutions, the CBIRC has targeted practices ranging from high levels of borrowing and lending between banks themselves to the less regulated shadow banking sector, which has been a major funding source for smaller companies.
It has also pressed banks to speed up disposal of bad loans and encouraged companies to convert debt into equity to free up capital for new lending.
The scale of high-risk assets shrank by about 12 trillion yuan ($1.79 trillion) in the previous two years, while lenders disposed of 3.48 trillion yuan in non-performing loans, the regulator said.
More than 2 trillion yuan worth of debt-for-equity swap deals have been signed by lenders, it added, though details of many of those arrangements have been murky.
It has also banned consumer loans from being used illicitly to speculate on property to avoid fueling real estate bubbles.
The CBIRC said shadow banking risks have now been contained, which will allow policymakers to better balance the need for stable economic growth this year while continuing to reduce financial risks.
The IMF estimated in 2017 that China’s total non-financial sector debt would rise to almost 300 percent of its gross domestic product (GDP) by 2022, up from 242 percent in 2016.
But hidden borrowing by Chinese local governments could be as high as 40 trillion yuan — amounting to “a debt iceberg with titanic credit risks”, S&P Global (NYSE:) Ratings said in a report late last year.
When including off-balance sheet local government debt, China’s ratio of government debt to gross domestic product (GDP) could have reached an “alarming” level of 60 percent in 2017, according to S&P.