WWAR_2.016

Christopher Wood christopher.wood@clsa.com +852 2600 8516
Private sector capex accounted for 62% of total fixed asset investment in the first 10 months of
2018. By contrast, residential property investment and infrastructure investment accounted for 13%
and 26% of total investment.
Meanwhile, meetings this week revealed a common concern that economic data is likely to continue
to slow in the next two quarters with residential property one area of continuing weakness. One
cause of weakness in this area is again policy-driven in terms of the government’s decision to wind
down the shantytown redevelopment plan. The money injected by the PBOC, via the state policy
banks, may decline by 40% next year according to CRR strategist Haixu Qiu. The slowing trend can
be seen in the decline in the so-called pledged supplementary lending (PSL) disclosed monthly by the
PBOC. The monthly net increase in PSL averaged Rmb83bn in 1H18 but has since declined to only
Rmb9.1bn in August and US$25.5bn in November (see Figure 5).
Figure 5
China net increase in Pledged Supplementary Lending (PSL)
180
160
(Rmb bn)
China net increase in Pledged Supplementary Lending (PSL)
140
120
100
80
60
40
20
0
-20
Jan 16
Mar 16
May 16
Jul 16
Sep 16
Nov 16
Jan 17
Mar 17
May 17
Jul 17
Sep 17
Nov 17
Jan 18
Mar 18
May 18
Jul 18
Sep 18
Nov 18
Source: CLSA, PBOC, CEIC Data
The positive side of the shantytown redevelopment scheme has been a big decline in unsold
inventory in China’s smaller cities. But the downside has been an increase in local government debt
at a time when Beijing, having addressed to a large extent the excesses in shadow banking, is now
starting to focus on China’s other big debt issue. That is the so-called “hidden” debt of local
governments, which includes the debt of local government financing vehicles (LGFVs). Guesstimates
of the total size of this exposure are enormous, ranging from Rmb30tn to Rmb40tn.
This is a work in process and GREED and fear does not pretend to be an expert. But the key point is
that default risk at LGFVs is on the rise, as noted in a recent S&P report (see S&P Global Ratings
report: “China’s hidden subnational debts suggest more LGFV defaults are likely”, 15 October 2018).
This is because the State Council has made it clear that all LGFV borrowings since 2015 will be
treated as corporate borrowings and are, therefore, not guaranteed by the central government. See
attached chart on LGFV refinancing schedule (see Figure 6).
Thursday, 13 December 2018 Page 4