China’s central bank warns of rising debt

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 to guard against excessive leverage 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% 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% 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’s Mark Zuckerberg, UBS Group’s Sergio Er motti 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,” IMF MD 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.”