China risks post-pandemic credit crunch, analysts warn

China risks post-pandemic credit crunch, analysts warn

The TelegraphTom Rees

·2 min read  

A Chinese flag flutters outside the headquarters of the country's central bank in Beijing - Petar Kudjundzic /REUTERS
A Chinese flag flutters outside the headquarters of the country’s central bank in Beijing – Petar Kudjundzic /REUTERS

Beijing risks triggering a credit crunch in China as it returns to its drive to slash debt piles after surviving the worst of Covid-19.

Analysts have warned the world’s second-largest economy has started to clamp down on corporate credit growth again and risks tightening policy too far under its deleveraging efforts.

China’s “credit impulse” – a closely watched gauge that tracks the change in new credit, a leading indicator for economic activity – is expected to turn negative in 2021 after surging last year, according to UBS.

“Too much policy tightening, including regulatory tightening, could lead to credit crunch and market volatility,” warned Tao Wang, economist at the Swiss bank.

Xi Jinping’s government had suspended its plan to tackle indebtedness fuelling growth after China was rocked by the trade war and pandemic.

Before the trade war erupted, China was attempting to rein in a credit boom, clamping down on state-owned firms while tightening monetary policy and regulation.

Mr Wang predicted that Beijing will focus on “containing financial risks” and controlling debt in 2021 as growth rebounds.

He said the negative credit impulse is likely to have a limited impact on growth as improving cash flow will cut demand for loans, but warned Beijing’s tightening could “lead to more defaults and market volatility”. 

Overtightening could trigger a “significant slowdown in credit growth”, leading to “weaker business investment and overall recovery”, Mr Wang cautioned.

“More notably, such a scenario may cause a partial credit crunch and fluctuation in the equity and credit market.”

A move to curb credit growth is in sharp contrast to the rest of the world, which is keeping monetary and fiscal policy ultra-loose to support the recovery.

While the Chinese economy was the first to be crippled by Covid, it emerged from 2020 on the front foot despite plunging demand elsewhere.

The International Monetary Fund expects China to be confirmed as the only major economy to expand in 2020 after containing the virus.

“The Chinese economy has recovered well and therefore the government has restarted structural reform,” said Iris Pang, China economist at ING.

“The most obvious of these reforms is deleveraging, which allows the market to determine which companies will fail. But the biggest risk, which is the real estate sector, is simply too big to fail.”