Boom or bust

Differing messages from IMF meeting and Xi’s address to Party Congress


He spoke for three and half hours

China’s A-share market climbed to an all-time high of 6,124 on October 16, 2007. It was a watershed moment that investors remember well. It came just a day after the 17th Party Congress which confirmed Xi Jinping as China’s leader in waiting. But it also marked the beginning of a 73% slide in Chinese stocks over the following year.

This Monday – when much of the attention has been focused on the current 19th Party Congress – media outlets still found time to commemorate the tenth anniversary of the so-called “A-share 6,124 moment” and review what lies ahead for Chinese stocks.

A decade ago there were 1,479 A-share firms with a combined worth of Rmb2.76 trillion ($416.17 billion). Ten years on, the number of stocks has climbed to 3,405 with a total market value of Rmb5.78 trillion. However, the key index in Shanghai is hovering around 3,300 points, or 40% lower than its peak. The conclusion, according to Sina Finance, is that the stock market has been a good place for state firms (SOEs) to raise funds but less pleasant for investors who want capital gains.

So will the 19th Party Congress provide another pivotal moment for the A-share market? Xi kicked off the twice-a-decade summit on Wednesday by promising that the country had started a “new era” where China will “take centre stage in the world”.

“The Chinese Communist Party has drawn up a two-stage development plan for the period from 2020 to the middle of the 21st century to develop China into a great modern socialist country,” he proclaimed in a three-and-a-half hour speech.

But at the IMF/World Bank meetings in Washington last week the chief focus for experts was the price that China is paying to sustain its growth. In a session covering life after the Congress, speaker after speaker reiterated concerns about the increasing leverage in the economy and what might happen when the country tries to wean itself off its surging appetite for debt.

James Daniel, an assistant director at the IMF, compared the situation to a “runner on steroids”, while Brian Coulton, chief economist at Fitch Ratings said it was a case of “same old, same old” as policymakers pump-prime growth by turning on the credit taps.

Coulton and Daniel agreed that while the overall debt-to-GDP ratio may have fallen marginally from 268% to 267%, the decline is hardly a sign of deleveraging. Both men said debt for equity swaps by local gov ernments have flattered the numbers and speculated whether a newly emboldened Xi might now allow a local government financing vehicle (LGFV) to default as a warning to others.

Coulton estimates that total credit has expanded by about 14.5% so far this year, outstripping increases in nominal GDP. He also pointed out that non-financial corporate debt is dangerously high at 165% of GDP, compared to 73% in the US and 104% in Western Europe.

“At some point there has to be an adjustment,” he said. “Debt to GDP has to flatten and that will impact GDP. There’s no getting away from that.”

Gene Ma, chief economist at the Institute of International Finance said the best the market can hope for is a slowdown in the rise of debt as a proportion of the wider economy. But Coulton highlighted that instead of reducing its borrowing, China has shifted credit growth away from local governments towards the household sector, which has traditionally saved 40% of its income. He said that while leverage is still low as an overall percentage of GDP in China, debt levels aren’t minor in relation to household income (at 95%). Ma worried too that the need to finance domestic debt could force the central bank to maintain low interest rates.

The central bank governor also seems concerned. Zhou Xiaochuan held a press conference this week on the sidelines of the Party Congress and warned that China faced a possible “Minsky moment” where economic risks could trigger a “sharp correction” and defaults.

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