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A Problem Too Large to Outgrow

문서에서 Credit and Credibility (페이지 47-52)

During China’s last period of financial system distress, around the Asian financial crisis in the late 1990s, Chinese banks were recapitalized and listed on overseas stock exchanges (primarily in Hong Kong), with rapid economic growth allowing China to reduce the impact of the older “problem” lending over time. The issue China faces this time is that the banking system is not nearly as simple to restructure as it was in the

51 Data from China Banking Regulatory Commission, Bloomberg.

http://www.cbrc.gov.cn/chinese/home/docView/44E986F2C2344E508456A3D07BC885B6.html.

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late 1990s, and China cannot effectively grow its way out of the problem. The deleveraging effort that Beijing is currently attempting is therefore logical because the scale of China’s borrowing is such that it must be controlled at the source rather than diluted over time.

The legacy debt within China’s financial system represents a key constraint on the future growth of the economy. A rough calculation of China’s total interest burden, using a quarterly data point provided by the PBOC for the average interest rate on all forms of lending in China, suggests that interest costs alone were around 12.3 trillion yuan in 2017, or around 15 percent of GDP. This is much larger than the expected nominal growth of the economy, even during a year when stronger-than-expected inflation boosted nominal growth. The interest burden has been larger on an annual basis than the level of nominal GDP growth since 2012, when China’s financial system started changing fundamentally. Freeing up resources within the financial system requires shrinking it or removing some of the assets. Without changing the distribution of credit substantially, the net result will be more credit used to pay interest on existing debts rather than funding for new investments.

Figure 2-9: Nominal GDP Growth and Estimated Interest on Total Debt, 2006-2018 Trillion yuan, percent of GDP (RHS)

Source: People’s Bank of China, National Bureau of Statistics, RHG Calculations.

China has two key levers to reduce the impact of the debt burden over time: reduce interest rates through government subsidies to the banks—in effect, using fiscal policy to support debt; or accelerate nominal growth to reduce the impact of the debt over time. The latter solution involves considerable uncertainty because it would require significant inflation, which is not only politically dangerous in China, given high household savings rates, but also difficult to implement without a sharp expansion in the money supply, which would probably put significant pressure on China’s currency. Otherwise, future growth needs to occur without a further buildup in debt, which will require significant changes in the efficiency of China’s financial system. Even that solution is fraught with difficulties, as the next chapter will discuss.

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Interest on Credit Nominal GDP Growth Interest as % of GDP (RHS)

With China’s potential growth rate set to slow in the future due to the end of labor force growth and moderating capital stock growth, the efficiency of the financial system becomes of paramount importance as a variable determining China’s future growth rate. However, because of the rapid expansion of China’s financial system that has already occurred, reforming that system requires reducing the growth of financial assets over time, as well as the financial system’s importance within China’s economy. This will, at least at first, almost certainly mean a reduction in the GDP growth rate as new lending growth is significantly curtailed.

Even if Beijing wanted to maintain the growth of China’s financial system at current rates, this is no easy task. Even under conditions where China’s credit demand remains strong and borrowers still want to borrow aggressively despite rising risks, keeping a $38 trillion banking system growing at around $4 trillion in assets per year (the average pace of annual banking system growth from 2014 to 2016) requires finding a corresponding $4 trillion in funding for banks, or having the central bank create such funding.52 In addition to simple funding requirements, capital requirements and other regulatory restrictions prevent banks from expanding assets quickly. Bank loans create new deposits but also require additional

provisions. Much of the asset growth of smaller banks, in particular, has been structured in non-loan forms precisely to avoid provisioning and capital requirements. Nonetheless, the Chinese system as a whole is still chronically short of capital, primarily because it has grown so fast. The average stated capital adequacy ratio for listed Chinese banks is 10.16 percent.53 This means that if the banking system is going to continue expanding at around $4.0-4.5 trillion in assets per year, banks must raise an additional $400 billion in new capital annually to meet regulatory requirements. This is also no easy task.

Often, profitable banks can find new sources of capital from retained earnings, but Chinese banks are not very profitable in the aggregate and therefore not profitable enough to sustain a rapid rate of growth. The average return on all assets in China’s banking system is less than 1 percent, and significant proportions of these profits are turned back to shareholders, including the Ministry of Finance, in the form of dividends.54 This means banks face a choice of continuing to issue equity and debt in capital markets, or, if they are unable to do so, attempting to engage in regulatory arbitrage to reduce their capital requirements. Given the size of China’s banking system, continued expansion at the current pace represents a distinct and rather difficult challenge.

There are no easy solutions that would allow China to shrink its financial system while maintaining current rates of economic growth. But the present deleveraging effort is a step in the right direction because China cannot realistically grow its way out of its debt problem, nor can the country continue on the business as usual path of financial system growth. This is the dilemma China faces after years of rapid domestic credit growth. This dilemma is entirely of China’s making, not a result of external factors. The questions for this study are whether there are China-specific factors that will permit avoidance of either a financial crisis or a sharp slowdown in growth, and how resilient those factors will be.

52 Data from the People’s Bank of China, http://www.pbc.gov.cn/diaochatongjisi/116219/116319/3245697/3245856/index.html.

53 KPMG, “2017 Q2 China’s Banking Sector: Performance of Listed Banks and Hot Topics,” October 10, 2017,

https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2017/10/china-banking-sector-performance-of-listed-banks-and-hot-topics-2017-q2.pdf.

54 CBRC data shows 1.65 trillion yuan in total profits from commercial banks in 2016, reflecting 0.71 percent of total assets of 230.4 trillion yuan in the banking system. The proportion of returns varies over time but has generally trended below 1 percent.

Chapter 3 | Savings and China’s Credit Distribution

China has a high national savings rate by any meaningful standard. According to the World Bank and China’s own statistical bureau, China saves 46 percent of national income, by far the largest proportion of any of the 20 largest economies in the world. A high savings rate is often cited as a key factor why China is insulated from financial crisis; countries with high savings rates should have few difficulties meeting any shortfall in domestic liabilities. The essence of the argument is that because investment has been funded in large part by domestic savings, which is inherently more stable, China has avoided exposure to financial risks from movements in the exchange rate and in interest rates on foreign borrowing and wholesale funding.55 In addition, this argument usually implies that Chinese authorities can deploy savings in a targeted fashion to meet any domestic funding shortages in the event of a financial crisis. A corollary is that the higher savings rate has facilitated higher investment and credit-to-GDP ratios, so that these metrics are not necessarily as concerning in China as they would be in other economies with lower savings rates.

However, by looking at where savings are concentrated among Chinese households and corporates, China’s high savings rate does not appear to be a useful “buffer” against financial crisis or a sharp slowdown in growth. While in the aggregate China’s high savings seems capable of keeping the system solvent in a crisis, the reality is that these assets are placed at different institutions and sectors of the economy than those where solvency or liquidity emergencies are likely to arise. China’s savings appears to be concentrated among wealthier households, which is not surprising given the increase in inequality in recent years. Savings rates are also highest among two types of corporates: private firms that have limited interactions with the financial system, as well as larger, national state-owned corporates that hold effective monopolies in some sectors. These areas where savings are concentrated do not correspond to where China’s debts are accumulating. Most of China’s debt is building up at lower income levels within the household sector and with local government-linked corporates and property developers.

While policy reforms could devise mechanisms permitting regulators to draw upon assets from one part of the system to meet temporary shortfalls in other parts—such as by drawing upon SOEs’ dividend flows or imposing taxation solutions to close gaps—such reforms take years to implement, are not imminent, and cannot be considered a solution to short-term liquidity difficulties in the financial system at this point.

High savings rates are not necessarily useful when confronting financial pressures such as sudden withdrawals of financing from banks or non-bank financial institutions. Most of the more vulnerable banks in China’s financial system are smaller institutions tied to local governments, national banks heavily dependent upon wholesale funding, rural financial institutions, and informal or under-regulated private lenders. Pressure on these banks’ financing channels will probably occur via scenarios such as a

withdrawal of deposits because of a sudden disclosure of large defaults among local government-linked institutions, or a differentiation of counterparty credit risk within China’s money markets.

55 See, for example, Chen Zhao, “Stop Worrying about Chinese Debt, A Crisis Is Not Brewing,” Financial Times, December 4, 2017, https://www.ft.com/content/0ca50290-d82c-11e7-9504-59efdb70e12f. Also, see Sheng and Soon, 134, where Wang Yao and Jodie Hu argue in Chapter 5 that the low level of household debt permits households to absorb shocks to income resulting from costs to the financial system from shadow banking-related losses.

Moreover, China’s high savings rate is a key challenge to China’s medium-term sustainable development.

Ultimately, savings is delayed or foregone consumption. Early in China’s rapid development during the reform and opening era, a high savings rate was beneficial to China, as the country was short of capital and a higher rate of investment enhanced productivity and a faster pace of economic development for China as a whole, even if this was less helpful for households because they were consuming a smaller share of national income. Over time, however, the persistence of China’s high savings rate has been more

problematic for China’s development, as the marginal benefits of additional investment of capital for the same purposes as in the past are much smaller in the present, and the likely costs of accumulating additional debt are larger.

There is a robust debate concerning why China’s savings rate remains so high, with contributions from both Chinese and non-Chinese economists. Demographic factors created by the legacy of the one-child policy, which started in 1980, have played a role in boosting China’s savings rate, with the aging of the population expected to bring down savings rates over time. Chinese households may have saved so much because of the country’s weak social safety net, requiring precautionary savings as a bulwark against financial uncertainty. Income inequality is also playing a role: as in most countries, China’s household savings is concentrated at the upper end of the income spectrum, with wealthier households spending a smaller proportion of their income. China’s companies are also saving more over the past decade, as low interest rates have effectively subsidized profits for China’s state-owned enterprises.

Figure 3-1: China’s Domestic Savings Rates by Sector Percent of GDP

Source: Flow of Funds Table, National Bureau of Statistics.

For over a decade, Chinese leaders have been trying to reduce the savings rate and promote domestic consumption to rebalance the economy. As far back as the 2004 Central Economic Work Conference, Chinese authorities emphasized the importance of shifting the growth model away from investment and

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exports toward domestic consumption, which would involve reducing the national savings rate.56 Former PBOC Governor Zhou Xiaochuan commented in 2011 that the high rate of investment resulting from a high savings rate “may cause overheating and overcapacity in some respects . . . and may also irritate certain bubbles easily.”57 Efforts to improve China’s social services at the local level over the past decade are generally aimed at reducing precautionary savings and incentivizing consumption over the medium term.58 Reducing China’s savings rate over time is a key macroeconomic challenge for China’s leadership, and will be necessary to rebalance China’s economy toward more sustainable drivers of growth.

The misallocation of capital to fund excessive investment is also a key challenge to China achieving its medium-term potential growth, as discussed in Chapter 1. China must not only slow credit growth but reallocate credit in the financial system toward different uses to improve efficiency and total factor productivity. But there is no easy way to break away from the “business as usual” path of credit allocation without incurring some short-term pain and the fiscal costs of corporate or banking system bailouts.

Successful reallocation of credit at a macroeconomic level would probably take place within the corporate lending portfolio, cutting off “zombie” state-owned enterprises and other unproductive local government investments. Without changing the allocation of credit, however, China’s high savings rate will be a fundamental contributor to growing risks in the financial system and the economy as a whole. Rebalancing China’s growth model and reducing the savings rate are longer-term challenges. In the short term, the savings rate is unlikely to be helpful in meeting more pressing threats to China’s financial stability.

문서에서 Credit and Credibility (페이지 47-52)