China’s top banker echoes IMF, warns of debt crunch

China’s central bank chief, Zhou Xiaochuan, has issued stern warnings about the country’s rising debt levels.

Zhou Xiaochuan is approaching retirement from the People’s Bank of China.

China’s central bank chief, Zhou Xiaochuan, has issued stern warnings in a long article on the central bank’s website about the country’s rising debt levels.

China’s overall debt at the start of this year was 247 per cent of GDP, mostly comprising corporate debt which then reached 165 per cent of GDP.

The accumulation of further debt since then has triggered warnings in the past few months from the IMF, and downgradings of sovereign ratings, first by Moody’s and then by Standard & Poor’s.

Mr Zhou, governor of the People’s Bank of China, spoke during the recent Communist Party congress of the danger of a “Minsky moment” engulfing China. His new article emphasises that this warning was not a throwaway line, but was carefully considered.

Hyman Minsky, an eminent US economist who died 21 years ago, highlighted factors potentially contributing to a sudden collapse of asset prices following a long period of economic growth, chiefly due to an unsustainable debt build-up or to currency pressures.

Mr Zhou, 69, has perhaps been emboldened to become more frank as his retirement after his 15-year tenure approaches following the National People’s Congress annual session next March, when many new government appointments will be announced in the wake of the party congress changes.

The governor’s article underlines the seriousness with which debt concerns are being regarded at top levels in China.

He says that while the financial system remains overall healthy, “hidden, complex, sudden, contagious and hazardous” risks are accumulating.

He says about China’s high leverage rate, that “in sectors of the real economy, this is reflected as excessive debt, and in the financial system, as credit that has been expanding too quickly” — at a rate perceived as potentially more troubling than the quantum.

Mr Zhou criticises local governments, whose financing vehicles are ultimately responsible for much of China’s debt, for tolerating or encouraging a degree of credit risk that has undermined confidence, both within China and overseas, in the country’s financial system.

He says non-performing loans have eroded banks’ capital and their ability to withstand risk. And defaults in the bond market have increased, he says, causing, inevitably, bond issuance to decrease.

His answers include debt-for-equity swaps, equity financing, developing private equity funds and winding up “zombie” firms that require repeated bailouts.

Institutionally, he urges tougher regulations while allowing the market more scope to discipline aberrant lenders and borrowers.

He also advocates relaxing capital controls, following a year in which such controls have been tightened to combat the fear of capital flight, and of poor investment decisions even by the largest state-owned and private corporations alike.

Mr Zhou says “some internet companies that claim to help people access finance are actually Ponzi schemes, and some regulators are too close to the firms and people they are supposed to oversee”.

He further urges a reduction in the restrictions on foreign financial institutions’ operations in China.

The country promised such liberalisation 16 years ago when it joined the WTO.

But Guo Shuqing, the country’s top banking regulator, said during the party congress that it was “not a good sign in terms of competition” that foreign banks’ share of the Chinese banking market had halved over the past decade, to 1.3 per cent.

Mr Guo is being tipped to succeed Mr Zhou next year as central bank governor.