For the third time in less than a year on Monday, the People’s Daily published an extended interview with an unnamed official expounding the policies needed to address challenges facing the world’s second-largest economy. As in similar pieces in January and last May, which both preceded big stock market sell-offs, the speaker sought to clear up what were presented as misunderstandings about China’s policy plans. “It is very significant and may signal a shift in China’s policies,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Each time they publish this, it is normally a warning.” The benchmark Shanghai Composite Index fell 2.8 percent Monday, led by commodity producers and industrial companies, and reached its lowest level since March 11. Prices of the raw materials of investment-based growth — iron ore traded in Dalian and steel reinforcement-bar in Shanghai — slumped by the exchange-set limit for a day. Any mishandling will lead to systemic financial risks, negative economic growth, or even have households’ savings evaporate. That’s deadly.”
In March, S&P Global Ratings cut the outlook for China’s sovereign grade to negative from stable after a similar revision by Moody’s Investors Service, which questioned the government’s ability to enact reforms. China has accumulated debt faster than any Group of 20 nation over the past decade, climbing to 247 percent of gross domestic product.
The latest article said confidence in China’s economy was valid, even as it reiterated the “L-shaped” growth pattern quip and said weak demand and overcapacity would persist through the coming years.
On Tuesday, the China Securities Journal reported that authorities including the National Development and Reform Commission and the Ministry of Industry and Information Technology were accelerating a draft plan to deal with unproductive “zombie companies” and cut overcapacity. The newspaper didn’t say where it got the information. China’s total borrowing soared to an estimated 247 percent of GDP at the end of 2015 from 164 percent in 2008. That’s faster than the increase in the U.S. and U.K. in the run-up to the 2008 financial crisis. The problem could be bigger still because the frantic pace of new lending makes it hard to know how many loans aren’t being repaid. Regulatory loopholes and widespreadshadow banking practices further complicate the picture, as does a system of implicit guarantees that obscures how much of the debt is backed by the government or who would be allowed to go bust. Local and provincial governments have borrowed about $4 trillion—the size of Germany’s economy—and some used shorter-term, off-balance-sheet borrowing to fund dubious infrastructure and real estate projects. Chinese authorities are gradually allowing more defaults, which is driving up financing costs for companies. Banks have begun exchanging high-interest loans to local governments for low-cost bonds in a state-backed swap program that may expand to 15 trillion yuan ($2.3 trillion).