Rising corporate profits are providing Chinese policymakers with room to do more to tackle the country’s growing debt problems without inflicting major damage on the economy.
Profits are increasing even though financial conditions are tightening in some significant areas of the economy; lending rates have inched higher, regulators have clamped down against risky lending and have moved to take the heat out of the property sector.
The economy is also comfortably on course to meet the government’s GDP growth target this year of around 6.5%.
Although it is far from certain the government will tighten credit conditions further, some economists expect policymakers to move that way once President Xi Jinping consolidates power at a key five-yearly Communist Party Congress later this year. “There’s more room to experiment (with tightening credit). It is the right timing and moment to do so against this backdrop of a strong growth momentum,” said Andrew Fennell, the main sovereign analyst for China at Fitch Ratings.
The government has made reducing China’s debt burden a priority this year after credit soared following the global financial crisis.
The International Monetary Fund warned last week that China’s credit growth was on a “dangerous trajectory” and called for “decisive action.” The Bank for International Settlements said in September excessive credit growth was signalling a banking crisis in the next three years.
But a few things are falling into place to ease worries that further moves to curb debt would prompt an economic and financial crisis.
Thomson Reuters data of almost 1,000 Shanghai-listed non-financial companies shows net profits rose almost 70% in the first quarter from the same period of 2016.
Results so far from the second-quarter earnings season suggest continued momentum on a pick-up in global trade and economic activity: Gansu Jiu Steel expects a 54% first-half net profit rise, while China Coal Energy expects net profit of 1.5-1.8bn yuan from 616mn a year earlier.
For the 104 companies for which 2017 estimates are available, analysts predict a 38.25% overall increase in net profits, compared with 10.6% growth in 2016.
Annual profits either shrank or barely grew over 2011-2015, which contributed to the rapid accumulation of debt.
Benchmark policy rates have been on hold for almost two years.
But average lending rates edged up to 5.67% in June, the highest since September 2015, from 5.53% in March, the second-quarter policy report from the People’s Bank of China showed earlier this month.
Total social financing (TSF), a broad measure of credit and liquidity, fell to 1.22tn yuan in July from 1.78tn in June.
Still, TSF grew 13.2% from a year earlier, suggesting authorities do not want to hit the brakes too hard.
The government appears more tolerant of company failures as well.
A Fitch analysis of files from the Supreme People’s Court shows there were 4,700 bankruptcy cases between January and July this year, compared with 5,665 for all of 2016 and 3,684 in 2015.
Even if this signals Chinese policymakers are more tolerant of companies being pushed into bankruptcy, analysts say it also suggests they are moving slowly so as not to destabilise the economy.