Beijing Takes a Gamble on Debt

SHANGHAI — As China’s economy slows and the trade war with the United States intensifies, Beijing’s economic bosses are swinging into action.

Chinese officials are pushing banks to lend more and allowing indebted local governments to spend money on big projects again. They have moved to shore up the value of the country’s currency. They have also helped out the stock market, say financial analysts, as the government works to avert a stock market collapse like the one three years ago that shook the world.

“It’s a line in the sand for the leadership” of China, said Hao Hong, research director for the international operations of the Bank of Communications, a Shanghai-based financial institution.

China is taking action as its problems mount. On Thursday the United States formally enacted its previously threatened tariffs on $16 billion in Chinese-made goods. Beijing said it would immediately retaliate with its own tariffs and file a complaint with the World Trade Organization. The moves intensify a trade war that has already affected more than $100 billion of goods and cast a shadow over growth prospects for China and the world.

China is playing a difficult game. It must deal with its weakening economy without worsening its onerous debt problems. At the same time, it has to shore up the situation at home if it hopes to continue to retaliate against President Donald Trump’s trade war broadsides.

So far, the trade war has had only a minor impact on China’s vast, $12 trillion economy. But the trade war complicates China’s deeper problems with its onerous debt levels. China has worked to wean its economy off its dependence on borrowing, but the resulting slowdown in growth has undercut that effort, leading Beijing to relent somewhat from the initiative. Should the trade war take a greater toll, China could direct its banks to expand lending further.

“The Chinese government always oscillates between maintaining stability and achieving quality growth,” said Zhigang Tao, a Hong Kong University economist. “When you see the government switch to stimulus, it generally means the government cares about stability.”

China’s softening economy has led some within the Trump administration to believe Beijing is vulnerable, which could lead the White House to escalate the trade war even further. Larry Kudlow, director of Trump’s National Economic Council, pointed out during a Cabinet meeting last week that China’s own official statistics for business investment, retail sales and industrial production have shown weakness in recent months.

“Right now, their economy looks terrible,” he said during the meeting, which was open to the media.

China’s most recent quarterly economic figures suggest growth is continuing at a steady pace. But economists generally dismiss those official numbers, which are much smoother and more predictable than the economic figures posted by the United States and other major countries.

Other indicators suggest a mild softening. Some consumers appear to be holding back. Infrastructure spending, which encompasses up to one-sixth of the Chinese economy, slowed sharply through the first seven months of this year.

The city of Harbin, a provincial capital in northeastern China, ran out of money last month to pay pensioners, and had to rearrange its finances to pay them later. Corporate bond defaults have increased this year, although they are still low by international standards. The country’s banks acknowledged last month a fairly sharp uptick in nonperforming loans, although that was partly driven by tighter auditing standards.

Signals of serious financial and economic weakness have prompted Beijing authorities to rush out their series of measures since the end of July.

China is taking steps to make sure its companies and spenders have enough money. The central bank announced Aug. 10 that it would make sure enough credit reached companies. China’s banking regulator announced Aug. 11 and again over the weekend that it wanted the country’s state-controlled banking sector to provide ample credit to exporters, small and medium-size businesses and infrastructure projects.

Regulators are taking other steps to give banks the financial space needed to step up lending. The official China Securities Journal reported Tuesday that financial regulations may soon be changed to let banks keep practically limitless holdings of local government bonds without including them in their calculations of their ability to endure hard times. The move won’t help China deal with the huge debt racked up by local governments in recent years, but it does free up money for banks to lend.

Authorities are also encouraging local projects. The Finance Ministry is helping deeply indebted local governments borrow far more money this autumn so that they can restart stalled infrastructure projects. China’s central planners have allowed a series of big local government projects to proceed that had previously been blocked because of debt concerns. This includes the construction of five subway and light rail lines in Changchun, a big industrial city in northeastern China where Toyota, the Japanese automaker, has extensive facilities.

The financial markets are getting a boost as well.

Through the spring and summer, share prices slid into a bear market, and China’s currency, the renminbi, dropped nearly 10 percent against the dollar. Since then, China — which keeps a tight grip on the value of its currency — has pushed it to gain value against the dollar.

Meanwhile, the stock market has risen in a move that analysts say has been helped by intervention from big, government-connected investors, a group sometimes known as the National Team. On Friday, Chinese share prices fell to their lowest closing level since early 2016. But through Thursday, the Shanghai stock market had risen almost 2 percent this week. China has also moved forcefully to reassure common investors. Its banking regulator has begun encouraging the country’s four big asset management companies to aid highly speculative peer-to-peer lending schemes that have been collapsing in recent months, though the details of that help remain unclear. And the government has deferred plans for a more stringent crackdown on various kinds of informal lending, or shadow banking, including off-balance sheet lending by banks.

Other data show how China is trying to pull off a difficult balancing act. Even as Chinese officials push for more lending, a broader measure of borrowing showed the overall flow of fresh credit slowed in July. That suggested lingering effects from authorities’ previous efforts to crack down on some of the murkier parts of the vast but rickety Chinese financial system.

Tolerating even more borrowing by heavily indebted local governments is a short-term measure that could create long-term problems.

Liu He, a vice premier and close adviser to China’s leader, Xi Jinping, pledged in January that Beijing would bring the country’s debt under control within three years. Beijing had clamped down on some bank lending to state-owned enterprises over the last few years, data from the Bank of International Settlements has shown. Letting local governments borrow more runs counter to that.

“The focus is no longer on deleveraging, but on transferring leverage from one sector to another,” said Zhu Ning, a Tsinghua University economist.

The injections of money by the government into the economy now may offset the withdrawal of money last spring during the deleveraging campaign, but may not be enough to spur an actual boom in the debt-laden Chinese economy, said Rodney Jones, a principal at Wigram Capital Advisors, a Beijing economic research firm.

“I’m really skeptical that stimulus creates a surge of growth like we have seen in the past,” he said. “I think stimulus takes out some of the downside.”