In the first three months of 2014, China GDP growth continued to follow a downward trend; figures from China National Bureau of Statistics highlight that during this period year on year growth was equal to approximately 7.4%, down 0.3 percentage point from the 7.7 percent registered at the end of 2013.
On the other hand, according to Standard & Poor’s estimates, corporate outstanding debts kept increasing, and this is especially true for key sectors of the Chinese economy i.e. machinery, shipping, construction and steel. At the end of 2013, outstanding debt held by Chinese non-financial companies hit a record high of about US$ 12 trillion.
As seen in Figure, the credit is offered by the so-called shadow banking system, not offered by the formal financial system but by a set of operators of different nature.
It has been suggested that the expansion of the credit market is necessary to deliver GDP growth. But the problem is that some non-financial companies are not able to achieve a good return on investment, and in turn are not able to respect their obligations, thus ending up in a default situation.
On one side the central bank has already limited lending to those sectors of the economy that were showing signs of overinvestment, including for example coalmining. On the other side, this introduction has contributed to the development of a “shadow-banking” sector.
Today, most of the inherent problems of this practice (firms not being able to repay the investors) have affected companies operating in the coal sector or more in general the energy industry, but it is very likely that this phenomenon affects other sectors of the economy, such as the property market.
The central government interest in abandoning coal as a primary source of energy is very strong. Contrarily, property markets are a critical success factor of the current and future development plans: rapid urbanization is indeed a major building block of Premier Li Keqiang’s social and economic policies.
This suggests that even if the defaults affecting coal-mining companies could be accepted, the same episode affecting big property developers could nourish public fears.
In this context, there is a growing expectation toward a reformation of the Chinese financial system, where private players could be able to deliver organic growth achieved through a better diversification of investment and more cautious debt management practices.
But the current situation is not pointing to this direction yet. For example, in 2014, credit to real estate developers has been falling, and a couple of weeks ago one of China’s biggest property developers, Vanke Group, declared that the “golden era” has come to an end, meaning that the drop in housing prices and decreasing funds availability is resulting in lower margins and lower returns on investment.
Although some measures have already been implemented, the financial system needs a major package of reforms: the interests of all investors will be captivated by their effective implementation.
Long term loans at reasonable interest rates is today’s request to Chinese banks.