China's Central Bank Chief Sounds Warning Over Rising Debt (1)

People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets.

China still has a problem with illegal fundraising and financial services are insufficient, Zhou said in a speech at the China Development Forum in Beijing on Sunday. He said the country still needs Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term to guard against excessive Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term in foreign currencies.

“Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.

Chinese leaders are struggling to balance between the meeting a target of at least 6.5 percent average annual growth to 2020, while addressing growing debt levels. In a briefing on March 16, Premier Li Keqiang said a high corporate debt ratio “is not new in China” and China would seek to bring it down with capital-market reforms.

Corporate debt alone now stands at 160 percent of China’s GDP, according to the Organization for Economic Cooperation and Development. The group’s secretary-general, Angel Gurria, said earlier in the day that sectors with especially high leverage include cement, steel, coal and flat glass, and China must address the issue. He called it a short-term risk.

Senior Executives

Zhou, 68, spoke on the second day of a three-day forum, where some of the world’s best-known executives -- including Facebook Inc.’s Mark Zuckerberg, UBS Group AG’s Sergio Ermotti and International Business Machines Corp.’s Ginni Rometty -- mingled with top government officials. The Chinese leadership’s message overall was that it would press ahead with necessary structural reforms even as economic growth slows.

“That transition is going to be good for China and is going to be good for the world,” International Monetary Fund Managing Director Christine Lagarde said at the event. “Like any transition, it will not go without some bumps on the road. And we should expect them because there is a delicate balance to be struck between deliberately slowing economy and reforms that need to be accelerated.”

Leaders including the PBOC’s Zhou have stepped up efforts to cushion China’s economic slowdown, with the central bank announcing on Feb. 29 a 0.5 percentage point cut to the amount of deposits banks must hold as reserves. Excessive monetary policy stimulus isn’t necessary to achieve China’s growth targets and prudent monetary policy will be maintained if there isn’t any big economic or financial turmoil, he said March 12.

Robust Markets

One option for addressing high leverage is to develop “robust capital markets,” Zhou said. The country should channel more savings into the capital markets, which will help reduce leverage in the corporate sector and boost equity financing, he said.

China’s yuan has declined 4.5 percent since a surprise devaluation in August spooked global investors and spurred capital outflows. The nation’s defense of the currency depleted its foreign-exchange reserves by $513 billion last year, the first-ever annual drop.

Asked about a rapid decline in China’s foreign-exchange reserves, Zhou said growth in reserves have been “explosive” after 1997 and between 2002 and 2008. Given the speed with which inflows grew, it was now only natural to see big outflows.

“It may well be that for too long a lot of investors were being used to having a currency that was appreciating, and of course it moves both ways depending on circumstances,” Lagarde said at a question-and-answer session with Zhou. She said the yuan’s rate was broadly in line with fundamentals.

Earlier in the day, Vice Premier Zhang Gaoli said the government would do what it must to avoid turmoil in stocks, the currency, bonds and property. He said the government should ensure that a plan for local governments to swap high-cost debt for cheaper municipal bonds proceeds.

“There will be no systemic risks -- that’s our bottom line,” Zhang said.

(Updates with additional comments from central bank governor.)

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Nicholas Wadhams, Allen Wan

By: Bloomberg News

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