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

China’s economy is proving less responsive to credit, escalating pressure on Premier Li Keqiang to strengthen the role of private enterprise.
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.