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China could inject capital into its banking system and accelerate the disposal of bad loans made under emergency Covid aid programs even as the economy returns to trend growth rates, a former member of the People's Bank of China's monetary policy committee told MNI.
Such a move could mirror action taken in the 1990s when state-owned asset management companies were established to take over the bad loans of the four big banks, Huang Yiping, now deputy dean of National School of Development at Peking University, said in an interview.
Chinese banks disposed of a record CNY3.02 trillion in non-performing loans last year, according to the China Banking and Insurance Regulatory Commission, adding that it expected the effort to continue in 2021.
While the government has provided no indication that it will bail out struggling lenders which have shouldered the task of supporting the economy, Huang said the PBOC will provide ample liquidity as they focus on cleaning up balance sheets and rebuilding capital.
The central bank will also ensure continued monetary policy support for what has been an uneven economic recovery, even if additional measures will be modest following its response last year to the unprecedented blow from the Covid-19 pandemic, said Huang.
Wary of financial risk even amid last year's disruption, during which it maintained its neutral "prudent" monetary policy stance, the PBOC will continue to monitor debt levels and the rising asset prices, said Huang, pointing to a surge in house prices in some cities as a particular cause for concern. In the longer run, the central bank may tighten policy in order to tackle high leverage, the economist said.
"The rapid rise in housing prices could generate financial risks. High asset prices will also divert financial resources, weakening support for investment and the real economy and weighing on the recovery," said Huang.
But in the short term, tougher property market regulations national wide could hurt growth, he noted. He suggested that some cities could instead introduce prudential measures this year, such as raising mortgage rates or increasing downpayment requirements to cool activity.
China's economic growth could return to its trend 6% this year, discounting base effects from last year's disruptions, he said, noting that even in the absence of a formal growth target, officials aim to keep the economy expanding at about this rate. But consumption is still sluggish and manufacturing investment soft.
As the authorities address excess leverage in parts of the economy, the government is likely to allow some state-owned enterprises to fail, but it will avoid widespread defaults which could prompt systemic effects, Huang said, noting that the public sector has plenty of profitable assets as well.
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