China Targets Spur Speculation of More Credit Loosening


chinaChina’s leaders spurred speculation they will allow the country’s $21 trillion debt mountain to inflate after refraining from cutting their annual economic-growthtarget.

Analysts at Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc. said authorities will need to loosen monetary policy, after Premier Li Keqiang yesterday announced a goal of 7.5 percent growth, the same target as last year. Li said China will seek an “appropriate” increase in credit.

Any easing would contrast with leaders’ efforts to rein in a $6 trillion shadow-banking industry and control the build-up of local-government debt that followed stimulus measures unleashed in 2008. Li is seeking to support growth amid three money-market rate surges in eight months and the threat of defaults of high-yield investment products and corporate bonds.

“I had hoped that they would pay more attention to curbing the risks but instead they focused on growth,” said Dariusz Kowalczyk, Hong Kong-based economist and strategist at Credit Agricole SA. “They will just have to pay the price of higher leverage and once they start to deal with this in earnest, the costs of solving the issue will be bigger.”

The benchmark Shanghai Composite Index (SHCOMP) fell 0.9 percent yesterday, the most in a week, amid concern that the country may face its first onshore corporate bond default. Shanghai Chaori Solar Energy Science & Technology Co. said it may not be able to make an 89.8 million yuan ($14.7 million) interest payment in full by the March 7 deadline.

Trust Bailout

The warning came little more than a month after the nation averted its first trust default in at least a decade as investors in a 3 billion-yuan high-yield product issued by China Credit Trust Co. were bailed out days before it matured.

Shadow banking was rated as the biggest challenge for the Chinese economy by more analysts than any other concern in a Bloomberg News survey of 29 economists ahead of the National People’s Congress meeting. The risk of vested interests blocking efforts to increase the role of markets in the economy was the next most-cited issue.

Economists also saw dangers from the property market; the increased funding required to generate each unit of gross domestic product; local government debt; and the threat that liberalizing interest rates will trigger financial turbulence.

The combined debt of Chinese households, corporates, financial institutions and the government rose to 226 percent of GDP last year, up from 160 percent in 2007, Credit Agricole estimated in a report last month. GDP reached $9.4 trillion in 2013.

Creating Money

“Given increasing credit risks, many would have expected Mr. Li to talk about financial deleveraging of some sort,” Kevin Lai, economist at Daiwa Capital Markets in Hong Kong, wrote in a note. “There is still a desire to ensure enough money is created to satisfy the refinancing pressure from many borrowers.”

The economy expanded 7.7 percent in 2013, the same pace as in 2012. Previous data this year have shown a slowdown in manufacturing, while trade and credit expansion exceeded estimates.

This year’s growth target is “flexible and guiding,” the National Development and Reform Commission said in a related report yesterday.

Li, who reiterated that China will pursue a “prudent” monetary policy, announced a target of 13 percent growth in M2, the government’s broadest measure of money supply. That was the same target as last year, when M2 expanded 13.6 percent. The budget deficit as a percentage of GDP will be about the same as last year, Li said at the annual meeting of the legislature in Beijing.

Leverage Pace

“If they are pursuing a trajectory to slow down the pace of leverage they should target a slower M2 growth,” saidWang Tao, chief China economist at UBS AG in Hong Kong, who previously worked at the International Monetary Fund. “Without doing that it’s not clear.”

People’s Bank of China Governor Zhou Xiaochuan may elaborate on monetary policy during a press briefing that normally is held during the legislature’s meeting, which ends March 13.

China hasn’t adjusted benchmark interest rates since July 2012 and is in the process of removing controls on borrowing costs and savings rates.

Currency Bets

The yuan slumped about 1.4 percent in February amid speculation the PBOC wants an end to the currency’s steady appreciation before a possible widening of the trading band. The yuan climbed 0.24 percent yesterday, the most since 2012, on anticipation the central bank has reached its goal of discouraging one-way bets on the currency after spurring last month’s record decline.

Zhou said recent foreign-exchange rate moves are “normal,” the official Xinhua News Agency reported on its microblog on March 4.

Not everyone saw a conflict between the growth target and China’s vow to introduce more market-driven change. Stable economic and labor-market conditions are “conducive for actually implementing the top-down reforms,” Qu Hongbin, chief China economist with HSBC Holdings Plc in Hong Kong, wrote in a note yesterday. “Reform and growth should support each other.”