Slow progress of deleveraging in China – study

Hang Seng reports that China will need to continue to drive deleveraging for a shift from an investment-and-exports-led to a consumer-and-services-led growth model.

Despite the forecast slowdown in Chinese GDP growth from 6.9% in 2015 to 6.7% in 2016, there has been little progress in deleveraging and destocking in China, according to a report by Hang Seng Bank, a principal member of the HSBC Group in Hong Kong.

While investment, and therefore GDP growth, has slowed, wrote the bank's acting chief economist Thomas Shik, the country's policy makers now have an opportunity to shift China's economic model to focus more on domestic consumption. He argued that though the shift is behind, the outlook for GDP growth in China this year is better than the IMF's forecast of 6.3 percent. Hang Seng's forecast is for 6.7 percent GDP growth in 2016.

The deleveraging progress in China remains limited with the continuous rise in total social financing and non-performing loan ratios, highlighted Shik. Total social financing, a broad measure of outstanding credit in the non-financial sector, reached 141 trillion yuan RMB ($21.6 trillion, €19.7 trillion) – equivalent to 209 percent of GDP in January 2016. 

Similarly, the non-performing loan ratio at commercial banks rose to 1.67 percent in the fourth quarter of last year, which was the highest since 2009.The ‘special-mention’ loan ratio, which refers to the proportion of loans that may turn bad or are showing signs of repayment risk, was even higher, at 3.79 percent, the report said.

The destocking cycle has also been long and slow, in particular the housing sector with overcapacity. The problem was driven by rapid credit growth. 

The residential home inventory remains near its recent peak in terms of months of supply. In recent months, the authorities have reduced housing transaction tax to increase the demand, but such step has yet to have a significant impact. 

Sectors linked to real estate have begun to react to the oversupply issue, the bank said. Steel and cement production began to fall in early 2015.