By Lingling Wei
BEIJING--China is stepping up monetary-easing measures in the
face of a worse-than-expected economic slowdown, as authorities
scramble to ease the heavy debt burdens of companies and
governments.
The People's Bank of China said Sunday it would shave a quarter
of a percentage point off benchmark lending and deposit rates,
effective Monday--its third rate cut in six months. The move
underscores growing fears among senior Chinese officials that a
severe debt overhang as a result of rapid credit expansion over the
past few years is threatening to derail efforts to pick up the
world's second-largest economy.
In one of the starkest official warnings about China's growing
debt woes, the PBOC said in its monetary-policy report Friday that
the "rising debt size is forcing China to use a lot of resources in
repaying and rolling over debt" while limiting the room for further
fiscal expansion. The Wall Street Journal previously reported that
the central bank is also considering a credit-easing tool that will
allow local governments to restructure hefty debts.
Meanwhile, easing measures taken by the central bank--including
two interest-rate reductions since November--have largely failed to
spur new-loan demand. Instead, the actions have triggered a strong
run-up in China's stock markets in recent months, which has helped
the authorities to keep funds from flowing outside China but also
led to concerns over speculative trading. Chinese shares tumbled
last week as regulators moved to limit investors' ability to buy
stocks with borrowed funds.
People with knowledge of the discussions say China's policy
makers are increasingly concerned that Beijing may fall short of
reaching its already-lowered expectations for growth--set at about
7% for this year, the lowest level in about a quarter-century. The
latest rate cut came after China reported disappointing trade data
on Friday and inflation data on Saturday that both highlighted weak
domestic demand and subdued manufacturing activity. The real-estate
market, which together with construction and other related
industries accounts for a quarter of China's GDP, remains sluggish,
casting one of the biggest shadows over the overall economy.
At the same time, bad loans are rising in China's vast banking
system, fueling worries among Chinese policy makers over the
country's rising financial risks. According to the China Banking
Regulatory Commission, nonperforming loans surged 140 billion yuan
($22.6 billion) from the beginning of the year to 982.5 billion as
of March 31, the biggest quarterly jump in more than a decade.
Dud loans made up 1.39% of all loans as of the end of March, up
0.14 percentage point from the end of 2014 and representing the
highest level in five years. The rise of bad loans is crimping
banks' profits at a time when they are being called upon to make
credit more accessible. China's top five state-owned banks, for
instance, saw their first-quarter profit grow less than 2%,
compared with the double-digit growth rate typically seen in
previous years.
The rate cut lowered by a quarter-percentage point both the
benchmark one-year loan rate, to 5.1%, and the one-year deposit
rate, to 2.25%. In a statement Sunday, the central bank singled out
low inflation as a trigger for the move, saying real interest
rates, adjusted for price changes, remain at historically high
levels. In addition, in another step toward freeing up banks'
deposit rates, the PBOC allowed Chinese banks greater flexibility
in deciding how much they pay depositors. With the latest move,
banks can raise one-year deposits rates to as high as 3.375%.
Of particular concern to officials at the PBOC and other
regulators is the potential for credit to freeze up as a result of
mounting defaults, Chinese officials and economists say. Already,
based on estimates by economists at Royal Bank of Scotland, more
than $300 billion in funds has left China's shores over the past
six months, partly from the strength of the U.S. dollar and partly
from ebbing confidence in the Chinese economy. More money could
flow out if defaults keep rising, drying up funds for lending.
As a result, China's authorities are trying to come up with
different ways to help alleviate borrowers' debt-repayment burdens,
even though that can mean taking a direct government role in
deciding winners and losers.
In Guangrao, an industrial county in eastern China's Shandong
province, tire maker Deruibao Tire Co. has become a key target of a
government-led rescue effort, according to a government spokesman
and others involved in the process. Like other Chinese companies,
Deruibao expanded rapidly soon after Beijing launched a
massivestimulus package in late 2008. It took on debt, mostly bank
loans, to build new plants, according to local officials and
bankers familiar with the company's finances. All had gone well
until last year, when plunging sales both at home and abroad led
its bank creditors to call in loans.
Earlier this year, the company went to the government of
Guangrao for help, according to a spokesman for the local
government. Local officials then tried to get its banks to extend
credit to the company, according to local officials and bankers
with knowledge of the negotiations. Two local banks obeyed the
order, these people said, but other national banks balked. Now,
according to the spokesman for the Guangrao government, the county
still is seeking to help prevent the company from filing for
bankruptcy by "actively coordinating with all parties
involved."
The main reason, according to Guangrao officials: Deruibao also
guaranteed loans taken out by other companies, and a bankruptcy
filing could trigger a chain of defaults.
"The regulators are on the lookout for any signs of systemic
risks," a Guangrao official involved in Deruibao's affairs said.
Representatives at the company declined to comment.
In addition to corporate debt, Chinese leaders have also singled
out the ballooning debts of various levels of government. But a
debt-for-bond swap plan aimed at giving provinces and cities some
breathing room has hit snags, as many of China's commercial banks
are balking at purchasing the new bonds.
That is prompting the PBOC to speed up consideration of A
strategy similar to the one used in Europe's bailouts, officials
with knowledge of the matter have said. Under the plan, the PBOC
would let commercial banks swap the local-government bonds they
purchase for loans from the central bank, with the aim of keeping
the debt-restructuring effort on track without causing a painful
credit crunch.
Many economists say the sharp deceleration in China's economic
growth and the need to resolve its debt issues could lead the PBOC
to launch more easing measures in the coming months. The central
bank, meanwhile, has maintained cautious about stepping on the gas
pedal too hard.
In the monetary-policy report released Friday, the central bank
said it would continue to adopt various tools to ensure adequate
liquidity in China's financial system while "preventing excessive
easing."
Write to Lingling Wei at lingling.wei@wsj.com
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