CIC plays down concerns over China credits
China’s banking system remains safe and sound despite growing concerns over shadow banking, according to a senior executive of China Investment Corporation (CIC), the country’s sovereign wealth fund that manages almost US$500 billion of its foreign exchange.
“As long as the economy sustains its healthy growth and macro policy remains consistent, we can solve some of these banking issues,” says Jin Liqun, chairman of the firm’s board of supervisors, in a Beijing forum organized by Pioneer Investments.
Jin was addressing market worries on the growing risks over commercial bank credits extended to local government funding vehicles (LGFV) and troubled real estate companies through shadow banking. Continued reforms on the financial sector and the equity market will be the key for China to solve these problems, he adds.
“If you look at the breakdown of these projects, most of them are very good projects. To get all the existing projects done is important,” he says, noting that much of the recent debt extended to local governments was mostly for refinancing while kick-off of new projects has slowed down.
As 50% of these debts are held by local governments of the more affluent eastern provinces, these debts should not be a concern, it was pointed out. For the rest for the loans, these will not be an issue if the existing projects can get enough cash to keep them going. Only about 10% to 20% of local government debts are high risks, Jin highlights.
On April 9, rating agency Fitch downgraded China’s long-term local currency to A+ from AA-, citing weakness in China’s economic structure, growing risks in shadow banking and indebtedness of local governments. On April 16, Moody’s Investment Services also cut China’s government bonds’ outlook to stable from positive on the back of related concerns. In the same week, the International Monetary Fund (IMF) trimmed China’s growth forecast to 8% from 8.2% previously.
In response to the rating agencies’ downgrade, Jin says “to guarantee China’s long-term debt to be on the safe side, they will tend to be a little bit conservative, I can understand. Overall, China’s economy is healthy and robust.”
“Some money goes into the real estate sector and some of these companies might have difficulty. This will not change the overall picture of China’s banking system. We are aware of the risks. That’s why various committees are doing something about it,” he adds, commenting that the issue of shadow banking exists because of the less developed financial system in China. “We need to deal with this by completely reforming the financial sector and equity market.”
“I believe state-owned banks are doing well, but they need competition, which comes from international banks. But international banks only operate in coastal cities. This then presents opportunities for small and medium banks,” he says.