August 20, 2018 / 7:15 AM / 3 months ago

Breakingviews - Even a cleaner China is tempted by old playbook

A Malaysian flag flutters next to a Chinese flag (L) as Malaysian Prime Minister Mahathir Mohamad visits China, at Tiananmen Square in Beijing, China August 19, 2018. REUTERS/Stringer

HONG KONG (Reuters Breakingviews) - An unusually harsh rebuke for one of its top bond rating agencies highlights China’s growth dilemma. Beijing is cracking down on Dagong Global Credit Rating over cosy corporate ties: the sort of links that have contributed to distorted risk pricing in the People’s Republic for years. Yet regulators are simultaneously leaning on banks to step up support for infrastructure, to help revive flagging growth. China wants both more lending and less risky practices: that’s hard to reconcile.

China’s securities regulator said on Friday that it would ban Dagong from undertaking new securities ratings for a year. It argues the firm rated companies to whom it also provided pricey consulting services, implying a conflict of interest. A clean-up is certainly long overdue: an eyebrow-raising 60 percent of outstanding credit bonds by value are from AAA-rated issuers, according to data provider Wind.

The punishment comes as officials work to tidy up the financial system more broadly. Last year they started to curb the country’s debt build-up in earnest, and to reduce risky off-balance sheet borrowing. That campaign has borne fruit: shadow banking assets declined to about 73 percent of China’s gross domestic product at the end of June, from a peak of 87 percent at the end of 2016, according to Moody’s.

But the push is now facing its biggest challenge yet. Growth slowed to 6.7 percent year on year in the second quarter, down from 6.8 percent in the first. It’s still comfortably above the target of around 6.5 percent, but officials are getting twitchy. The State Council last month called for a “more active” fiscal policy. Since then, ministerial announcements have nudged expectations toward looser fiscal and monetary policy. Over the weekend, the banking regulator asked financial institutions to step up credit support for infrastructure projects. 

All of this suggests Beijing is dusting off the old playbook: debt-fuelled infrastructure investment to rev up the economy. It doesn’t yet look like a re-run of 2016: the Politburo has called publicly for continued deleveraging, and officials are cautious. But the past weeks suggest this reticence may ease if the country’s expansion slows further - even if, as both China’s leadership and Dagong know, credit is a shaky foundation for long-term growth.

Breakingviews

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