China's Central Bank Governor Sounds Warning Over Debt Levels

People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying lending as a ratio to gross domestic product -- and especially corporate debt -- had become too high.

China still has a problem with illegal fundraising and financial services are insufficient, Zhou said in a speech at the China Development Forum in Beijing on Sunday.

“Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” Zhou said. He said a high Leverage ratio is more prone to macroeconomic risk.

Chinese leaders are struggling to balance between the meeting a target of at least 6.5 percent average annual growth to 2020, while addressing debt that’s raced to almost 250 percent of gross domestic product. In a briefing on March 16, Premier Li Keqiang said a high corporate debt ratio “is not new in China” and China would seek to bring it down with capital-market reforms.

Zhou has stepped up efforts to cushion China’s economic slowdown, with the central bank announcing on Feb. 29 a 0.5 percentage point cut to the amount of deposits banks must hold as reserves. Excessive monetary policy stimulus isn’t necessary to achieve China’s growth targets and prudent monetary policy will be maintained if there isn’t any big economic or financial turmoil, he said March 12.

One option for addressing high leverage is to develop “robust capital markets,” Zhou said, echoing Li’s remarks. The country should also channel more savings into the corporate sector, he said.

Zhou, 68, has warned banks about increased credit risk and rising real estate prices in the biggest cities. Property prices have begun to diverge severely from values in less-populated areas and the country faces "relatively big" downward pressure from efforts to eliminate excess housing inventory, which may suppress prices nationwide, he said March 12.

China must address short-term risks including “very high” levels of corporate debt, Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said at the same forum. Sectors with especially high leverage include cement, steel, coal and flat glass, Gurria said.

The OECD estimates corporate debt alone now stands at 160 percent of China’s GDP according to Gurria.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Nicholas Wadhams, Allen Wan

By: Bloomberg News

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