China Has Only Taken Baby Steps to Cut Leverage, S&P Global Says

(Bloomberg) -- China has taken “baby steps” toward cutting leverage as lending from banks slows, but progress has been uneven as borrowing by households and the government has risen, according to S&P Global Ratings.

Authorities are adopting both tight and loose policies to try to reduce the country’s dependency on debt without causing a hard landing, analysts led by Christopher Lee wrote in a note dated Oct. 16. S&P last month cut China’s sovereign rating for the first time since 1999, saying it didn’t believe enough was being done to contain credit growth.

The next big test is whether companies can withstand higher funding costs as financial conditions tighten, according to S&P. “Smaller and less-capitalized banks may feel the liquidity squeeze and pressures on their capital, leading to distress; and default risks could also increase for the local government financing vehicles,” the analysts wrote. 

“Passing the baton of credit-fueled growth in recent years to households also has many obvious risks,” such as a correction in the property market hurting consumption, they said.

China is trying to limit excessive leverage while maintaining an economic expansion that relies heavily on credit growth, and analysts expect the government to roll out more measures to curb debt. People’s Bank of China Governor Zhou Xiaochuan has voiced concern over the high level of corporate borrowing and argued for lower leverage.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, Philip Glamann

With assistance from Tian Chen