China’s emphasis on growth at all costs – Does it come with a heavy price in the form of long-term debt burden?

The Chinese Communist Party opened its first annual session of the National Peoples’ Congress (NPC) on March 03, 2014, and expects to end on March 13, 2014. The NPC is an annual gathering for Chinese government leaders, where national policy goals and agendas are being worked out that seek to reinforce China’s standing among its people and in the world. It is also the first annual gathering under the new leadership of President Xi Jinping, and Premier Li Keqiang as they seek to reaffirm their leadership roles in guiding China towards a path of sustainable economic growth.

Premier Li Keqiang used the first opening session of the NPC to deliver the country’s working report, where he reinforced China’s economic growth target of 7.5 percent, and consumer price inflation (CPI) at 3.5 percent in 2014. Premier Li did not elaborate much on the size of credit, and liquidity targets that will seek to achieve the 7.5 percent. The lack of concrete financial reform measures have led to many market observers expressing somewhat disappointment over the lack of concrete reforms that seek to tackle the local government debt levels, and reining in on the state of the USD 6.0 trillion shadow banking industry. Many market participants have earlier anticipated that the Chinese leadership will de-emphasise on economic growth targets, and instead focus on tackling the growing debt, and shadow banking issues. It is also remained unclear as to how the Chinese government plans to restructure the mountains of debt accumulated by the State, households, businesses, and local governments, which according to Bloomberg News through a Credit Agricole research report published in February, were estimated to have increased to 226.0 percent of Gross Domestic Product (GDP) in 2013, up from 160.0 percent in 2007. GDP during the whole of 2013 stood at an approximately USD 9.4 trillion.

Bloomberg News reported on March 06, 2014 that the economic growth target for 2014 currently set at 7.5 percent might bring about additional risks in the banking and financial services sectors, where this industry has been severely tossed around by the bouts of credit volatilities sparked off the various rounds of liquidity crunches. The Bloomberg News article has included interviews with analysts from Australia & New Zealand Banking Group Ltd. (ANZ), and Nomura Holdings, where most of the analysts’ concerns have been focusing on the 7.5 percent growth target, but it also comes with the increasing risk of rising public debt levels, at a time when Chinese monetary policy makers are trying to rein in on the credit growth path in order to seek for a sustainable economic growth momentum.

At the time of this report, a looming corporate bond payment default crisis is about to unfold involving a Shenzhen Exchange-listed solar panel manufacturer known as Shanghai Chaori Solar Energy Science & Technology, which has since came out to the public saying that it might miss a corporate debt payment in the form of a sum of 89.8 million yuan or USD 14.7 million interest payment in order to satisfy bond holders by the March 07 deadline. The example of the likes of Shanghai Chaori, and the near default situation two months ago involving China Credit Trust, a Shanxi Province unit of state-owned banking enterprise, the Industrial and Commercial Banking Corporation (ICBC), where it involved a trust product marketed by China Credit Trust since 2010 which has announced that in order to avoid further tarnishing of its reputation due to a looming payment issue, it has sought the assistance of ICBC, which returned agreed to pay back to full principal to trust holders in order to avoid a technical default that could tarnish the long-term standing of its parent company, and marketer of the trust product which has came to be known as the “Credit Equals Gold Opportunity Fund”.

The outlining of the policy goals by Premier Li Keqiang has not turned out well received by market participants who have expressed big concerns over the lack of specifics as to how to balance economic growth and credit growth. The lack of details on the issue of manageable debt levels seemed to have contributed to many uncertainties being faced by emerging economies such as China. It is clear that China is entering a phase of maturing economic growth, and is more so given that urgent reforms that seek to ‘repair’ the governance and financial regulatory frameworks have not been fully addressed. It does warrant much concern by investors over the extent and amount of debt in the financial system. However, the Chinese government, through the observations of past liquidity crunches offered no concrete solutions as to how they are going to permanently dealt with. This represents lack of transparency and urgent reforms that were being emphasised by many Chinese government leaders during their late October/early November 2013 Third Plenum meetings.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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