2019 Will Be the Year of ‘Re-Leveraging’ in China, UBS Says

(Bloomberg) -- China will again load up its economy with more debt in 2019 to cushion a deepening slowdown, according to UBS Group AG.

The nation’s total debt-to-gross-domestic-product ratio will rise again this year, after remaining flat in 2017 and declining in 2018, Wang Tao, head of China economic research at UBS in Hong Kong, wrote in a note Friday. That analysis came after new credit in January exceeded expectations, going beyond the normal increase at the beginning of the year.

Growth in aggregate financing -- the broadest official gauge of credit growth -- will rebound to nearly 12 percent this year from 9.8 percent in 2018, Wang wrote. At the same time, the expansion of nominal gross domestic product will slide to roughly 8 percent this year from 9.7 percent as inflation is expected to moderate, she estimated. In that scenario, the debt ratio grows.

“While the re-leveraging will likely be positive for short-term growth and the equity market, it may increase investor concerns about China’s medium-term objective of containing leverage and financial sector risks," Wang wrote.

Controlling such risks has been a central part of economic policy since 2016, and indeed “deleveraging” efforts have slowed credit growth and contained borrowing between financial institutions. That has held back economic growth though, and given headwinds from the trade war, China’s output was beginning to buckle until the campaign was softened last year. Now, the focus has turned to funneling new lending to the private sector.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Henry Hoenig

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With assistance from Bloomberg