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China Failure to Grow With $1 Trillion Is Warning to Li: Economy

China Shadow Banking Nothing to Fear, S&P Says
China’s economy is proving less responsive to credit, escalating pressure on Premier Li Keqiang to strengthen the role of private enterprise.
Enlarge image China Failure to Grow With $1 Trillion Is Warning to Li
A worker places parts for Beijing Hyundai Motor Co. cars on a shelf on the production line at the company's plant in Beijing, China. Photographer: Tomohiro Ohsumi/Bloomberg
China Must Open Up Markets, Choyleva Says
May 27 (Bloomberg) -- Diana Choyleva, director at Lombard Street Research, talks about the outlook for China's economic growth and the nation's need for financial reforms. She speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)
Enlarge image China's Premier Li Keqiang
Since taking office in March, Li Keqiang, China's premier, has pledged to reduce government interference and boost the role of private companies. Photographer: Zick Jochen/Action Press, Pool/Getty Images
The diminishing returns to lending heighten focus on the need for what the International Monetary Fund said yesterday are “decisive” policy changes in the world’s second-largest economy. Without a refocus away from state-approved projects, Li and President Xi Jinping risk overseeing both a further slowdown in growth and an increase in non-performing loans.
“Less efficient and more highly leveraged borrowers have been kept afloat, tying up credit that could be used to generate more growth,” said David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department. “To boost growth, China needs to channel more financing to its private enterprises, which are both more profitable and less leveraged than their state-owned counterparts.”
State enterprises have seen their return on equity fall to 5.9 percent last year from 10.2 percent in 2010, according to the Ministry of Finance. The biggest concern from China’s credit surge is the money going to companies and state-run enterprises whose performance is deteriorating, Francis Cheung, head of China-Hong Kong strategy at CLSA Asia-Pacific Markets, wrote in a May 9 report.

Bond Market

Signals from China’s bond market, which has expanded 39 percent so far this year compared with the same period in 2012, indicate businesses are struggling to improve profitability even with greater access to credit.
Borrowing in the debt market by the biggest Chinese companies is more than five times a measure of their operating earnings, twice the leverage ratio in 2007, according to data compiled by Bloomberg. State-owned enterprises in energy and power production are among the biggest borrowers, including China National Petroleum Corp., the nation’s largest oil producer, and China State Grid Corp., the country’s largest power distributor.

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