China 'Grey Rhinos' Lie in Cap Flows, SOEs, Property: Analysts

     BEIJING (MNI) - At a time when the Chinese government is trying to rein in

financial risks, analysts and financial regulators said Wednesday at a forum in

Beijing that the country's "gray rhinos" -- large and visible economic problems

that are neglected until they start moving fast -- could be triggered by capital

outflow uncertainties or risks related to state-owned enterprises, local

government debt and the property sector.

     "Our capital flows are affected by domestic factors, unlike the whole

emerging market, which is affected by outside factors" like actions taken by the

U.S. Federal Reserve, Zhang Bin, a researcher at both the China Finance 40 Forum

and the China Academy of Social Sciences, said. 

     Zhang noted that China's capital outflows are mainly driven by the

interest-rate gap between China and foreign countries, especially the United

States, and originate in price fluctuations among "cyclical" business sectors in

China -- a major one being the property sector. 

     China's property sector usually experiences price changes every three years

-- continuous price hikes for three years, followed by price drops for three

years, Zhang said.

     However, the force driving long-term consistent capital outflows over the

previously two-and-a-half years has been China's current foreign-exchange

pricing rule, which is not based on the market, Zhang stressed. 

     He said the periodic depreciations of the yuan over the past few years had

prompted companies and individuals to stockpile foreign currencies in case of

further yuan weakening. He warned that risks could accumulate and magnify as

long as the foreign exchange pricing system remains in place and the yuan is not

allowed to fluctuate freely.

     "In my opinion, the most effective shock absorber is the marketization of

foreign exchange," Zhang said. "It would inject market forces into the foreign

exchange market and not let such pressures accumulate."

     Jing Xuecheng, former deputy chairman of the research bureau at the

People's Bank of China and the current head of the China Real Estate Financial

Research Institute, stressed at the forum that the systemic risks in China's

property sector pose a possible "gray rhino."

     Jing indicated that more attention needs to be directed to the financing

situation in the property sector, where growth of investment and financing has

slowed, real estate companies' profits are experiencing large fluctuations, and

the financing structures of property developers are unreasonable. In addition,

as commercial banks tighten credit lending to the sector, property developers

are increasingly seeking new direct financing methods.

     He noted that changes in politics or the economy could lead to a slowing of

the property sector. When that happens, loans and mortgage defaults ensue as

housing price slumps so that financial institutions would bear substantial

losses. But Jing did not say China is currently in such a situation.

     The high leverage seen within Chinese state-owned enterprises (SOEs) was

also highlighted as a potential gray rhino by Sun Xuegong, the chairman of the

Economic Research Center at the National Development and Reform Commission.

     "High leverage is a significant risk facing China's economy, and the

problem essentially lies in high leverage of SOEs," Sun said. He noted that

Chinese companies have been deleveraging since the 2008-9 global financial

crisis, but that the process has been slow.

     "The risks of China's high leverage do not lie in short-term outbreaks of

debt," Sun said. "But the high leverage [of SOEs] creates severe restrictions on

the potential of medium- to long-term economic growth."

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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