HONG KONG (Reuters Breakingviews) – China is seizing an opportunity to clean house. From property to cars to chips, officials are pushing new rules and regulations to defuse risks and reallocate capital. It echoes the forceful effort to deleverage the economy in 2017 and, this time, President Xi Jinping may be willing to endure more disruption.
Three years ago, regulators took aim at the then-nearly $10 trillion shadow banking sector. These lenders grew rapidly, channelled excess funds into property and vanity infrastructure projects, and turned state firms into zombies. The crackdown pushed up bond yields and slowed economic growth: Xi put the cleansing on hold a year later as trade tension with the United States erupted.
Now there is a fresh focus on systemic risk as China makes a strong recovery from the pandemic. The biggest “grey rhino” risk is the property sector, the banking regulator warned on Tuesday, revealing that real estate loans amount to 39% of total bank loans which stood at $25.8 trillion as of September. Elsewhere, the state planner has ordered investigations into wasteful investment in chipmaking and new energy vehicles.
China is trying to stop entrepreneurs piling into anything that has a hint of policy support, a tendency that creates new bubbles and crashes. The electric car ambitions of indebted property developer Evergrande exemplifies the problem. Bond defaults by local government-backed companies, including the parent of BMW’s China partner, signal Xi’s waning tolerance to throw good money after bad. The abrupt halt to the initial public offering of payments group Ant, Alibaba’s payment affiliate, underscores a readiness to go after big companies too.
Left with the bitter after-taste of the 2017 campaign, Beijing will be mindful of the risks of a sudden tightening of liquidity and credit, but it will be hard to avoid in practice as investors adjust to new realities. The weighted average loan interest rate for all loans has crept up six basis points in the third quarter from the previous one as stimulus faded, according to a central bank policy report published last week. Bond yields and interbank rates have climbed above pre-pandemic levels.
A deep cleansing will ultimately boost real productivity and make China Inc more formidable. With the world in turmoil, Xi can reasonably conclude that it’s an opportune time to stop kicking the can down the road.
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