The People’s Bank of China cannot ignore the country’s massive debt burden any longer. It recognizes that it is becoming increasingly difficult to cope with the situation.
People's Bank of China adviser Huang Yiping said that deleveraging in China is not progressing and excessive leverage is a big financial issue for the country’s economy.
The heaviest debt load is recorded in Chinese housing and mining sectors. Leverage ratios in state-owned enterprises have been rising since 2008.
According to IIF, China's total debt is about 300 percent of GDP.
In its report, SocGen research firm said that government debt to depository banks is estimated at almost 7 trillion yuan. This reminds a modified form of quantitative easing, but the requirements include only federal and municipal government bonds.
Municipalities issue a large number of local government bonds with banks buying them and government debt to banks increasing. The program was launched in May 2015 and reached 3 trillion yuan in December. Currently, it is more than 3.6 trillion yuan.
Theoretically, when debt is secured by the government, banks should be more stable, but this is not always the case.
In the first half of the year, small and medium-sized banks attracted 34% of funds on the interbank market, and only 29% in January last year. Over the past three years, some banks boosted borrowings through repos by 75%, while consumer deposits increased by 20-25%.
The Chinese regulator is trying to control growth of the financial leverage in the economy by raising interest rates. But such an approach is rather risky as China can lose its investors.
Current stable situation on the interbank market is attractive for traders as it enables them to make long-term investments even in illiquid assets.
Meanwhile, the problem of shadow banking is still relevant. If banks are deprived of funding, they will go to the black market. Active use of the banks’ funding and shadow banking have already provoked a shortage in cash flow to pay depositors. At the same time, banks have mounting debt.
It turns out that when a bank needs to repay its credit obligations, it demands its money from another bank. Such a situation could ultimately cause a collapse of the Chinese banking system.
