World Economy

China Expected to Refrain From Deleveraging

China Expected to Refrain From DeleveragingChina Expected to Refrain From Deleveraging

China’s deleveraging campaign will create pockets of pain in markets over the coming year, without curtailing borrowing to the extent that debt actually declines, according to Pimco.

The Pacific Investment Management Co. predicts that Chinese companies will be able to refinance most of their borrowings in the next 12 months as the authorities refrain from carrying out broad-based deleveraging. This will contribute to debt expanding faster than nominal gross domestic product, said Luke Spajic, head of portfolio management for emerging Asia at Pimco, which manages $1.7 trillion, Bloomberg reported.

 “The overarching issue is that we don’t envisage a drop in the debt stock,” Singapore-based Spajic said in a phone interview. “In general, this market is domestically funded—so as long as China avoids a sharp economic slowdown over the next few years, then in all likelihood, this debt should all or in general be rolled over quite comfortably.”

His views come amid a concentrated deleveraging campaign in the world’s second-largest economy, with officials including the People’s Bank of China governor signaling that the drive will deepen.

“Regarding household debt levels, China doesn’t rank that high on a global scale, but the pace of growth has picked up in the last few years,” Governor Zhou Xiaochuan said Thursday. He didn’t expect any action should be taken immediately but said the debt levels should be monitored for quality and a steady pace of growth.

Spajic said, still, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan ($274 billion) in September. China’s corporate debt surged to 159% of the economy in 2016, compared with 104% 10 years ago, while overall borrowing climbed to 260%.

Spajic, who also spoke at The New Renminbi Reality Summit organized by Bloomberg Live in Singapore on Tuesday, said it isn’t unusual for China’s borrowing costs to climb at a time when global central banks are tightening. Some parts of the economy may face “credit deterioration”, he said, adding that China may raise interest rates to keep borrowing costs elevated, maintain tight capital controls and add more restrictions on the housing market.

China is having a “story of debt growth”, Spajic said at the RMB Reality conference, adding that tightening by the authorities is beginning to bite. The nation will have to allow capital flow in and out over time in a multiple-year process, he said.

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