。 ECONOMICS ● CHINA11 February 20192In China’s dual economy: The 70-30 split (29 May 2017), we argued that the best framework toanalyse growth and deleveraging in China is the ‘dual track economy’ framework. That is, Chinais one economy consisting of two parts: state owned enterprises (SOEs) and privately ownedenterprises. The latter are much more productive and dynamic. As of end-2018, the privatesector accounts for more than 90% of total exports, over 80% of urban employment, over 70%of patenting activity, and over 60% of GDP.Despite its dominant position in everyday economic life, the private sector does not, in fact, farewell in all areas. The financial system is one area where private enterprises are fairly marginalised.We estimate that the private sector accounts for 23% of all types of corporate borrowing as ofend-Q2 2018. To make up for this structural lack of financing, the private sector taps private equity,various forms of shadow-banking, and stock pledging, as well as borrowing from each other.The more fragile nature of the financing means that the business cycle in the private sector ismore boom and bust. The relative lack of stable financing support also means that the pace ofinnovation and upgrading, which requires the longer-term commitment of patient capital, is notas fast as it could be, even if it is already impressive by some accounts (see China innovation:Punching above its weight, 10 October 2017).All about the private sector Beijing is deploying regulatory ‘carrots’ and ‘sticks’ to re-allocatecredit to the private corporate sector This, plus tax cuts and structural reforms, should help remove thekey bottlenecks for private business investment A private sector-led growth recovery will be more sustainable andless debt dependentChart 1. The private sector share has increased across the economy…Source: CEIC, HSBC0 10 20 30 40 50 60 Urban employmentIndustrial productionExportsFixed asset investment Private sector share of economy, % 1981-19901991-20002001-20102011 -20152016 - Now3ECONOMICS ● CHINA11 February 2019Chart 2. …while its share of debt to GDP ratio has declinedSource: BIS, CEIC, HSBCIn sharp contrast to the private sector, China’s state owned sector is concentrated and slowermoving. Despite contributing less to economic growth, the state-owned sector enjoys relativelystable, cheap and a disproportionately large portion of financing from the banking system. Italso has advantages such as concessions and subsidies that are not enjoyed by the privatebusiness sector.We have been arguing that the ‘dual track economy’ is key to understanding China’s economicchallenges and opportunities. For example, this contradiction lies at the heart of China’s risingdebt to GDP ratio between 2012 and 2017 and provides a key to a ‘beautiful de-leveraging’solution – deleveraging through SOE reforms while keeping overall macro policies stable tosupport the private sector, which should in turn support growth (see Deleveraging China’s SOEs,14 August 2017).Nonetheless, the very different situations and divergent fortunes of the private and the SOE sectorshas been exacerbated by the intensified financial de-leveraging of 2018. As regulations tightened,shadow-banking activity contracted and overall credit growth slowed to 9.8% at end-2018 (from13% at end-2017). Although data are still being released for 2018, some credit indicators andanecdotal evidence suggests that the private sector’s credit conditions did tighten further in 2H2018. We believe that growth headwinds increased as a result of this development.Credit easing targets at private sectorRegulators are trying to turn this around. Since Q4 2018, a number of them, from the PBoC tothe CBIRC and the State Council have been talking about increasing the allocation of credit tothe private business sector. The CBRIC had floated a soft target of ‘125’, aiming for privateenterprises to account for one-third of new loans at large banks, two-thirds of new loans at smallto medium-size banks, and no fewer than half of all new loans in three years. The PBoC hasannounced further measures to reward banks that lend more to the private sector with cheaperliquidity assistance. Following is a summary of recent policy announcements. Funding: The PBoC can making lending to private sector businesses a more explicit andfrequent condition of liquidity provisions and cost of liquidity provisions. There have beentargeted reserve requirement ratio (RRR) cuts before. This could be broadened to apply tomore open market operations when appropriate.0 20 40 60 80 100 120 140 200620072008200920102011201220132014201520162017Q1-18Q2-18 % GDP Household debtSOEdebtPrivate corporations debtGeneral government debtECONOMICS ● CHINA11 February 20194 Regulatory ‘carrots’: The regulator changed the regulatory definition of ‘small and microloans’ in late 2018, making it both more practical (as the previous threshold was too limiting)and a positive incentive for banks to try to meet the desired threshold. More can be done,for example, to reward more active risk-pricing and to reward banks that have made moreuseful lending to the private sector. There are also discussions about ways to change theincentive mechanisms, such as from ‘lifelong responsibility’ – previously a disincentive tolend to private businesses, to ‘liability exemption on the basis of due diligence’. Soft guidance on lending quota: In late 2018, the CBIRC floated a soft target for loans tothe private sector that no fewer than one-third of the loans would be made to large banksand no fewer than two-thirds to small and medium-size banks, while no fewer than half of allnew loans would be made within three years. That remains a soft target, but looksachievable given historical trends. Therefore, the regulator is likely to use a lot of moralsuasion to achieve this goal. Credit enhancement: In late October, the PBoC announced that it will use its re-lendingpolicies to support private sector access to credit, using credit risk mitigation tools. It willoperate on the principles of selling credit risk mitigation tools and providing creditenhancement to competitive and promising private-sector businesses that encountertemporary issues with financing. The PBoC has provided RMB150bn in re-lending in Juneand announced plans to further provide another RMB150bn for this purpose. In December,the first credit enhancement tool was designed and sold on a corporate bond issued by aprivate-sector business. Although the scale is small at the moment, the potential marketsize can be large if these operational principles are feasible and, therefore, potentiallyhelpful for private sector businesses that have become the unintended collateral damage offinancial de-leveraging.In HSBC China MCI (18 January 2019), we calculated how much the private sector mightbenefit from loan re-allocation. Suppose that overall loans grow 13.5% in 2019, the same as in2018. This means an additional RMB18.4trn in loans. If the private sector’s share stays at 25%of outstanding, the sector’s loans outstanding will grow by RMB4.6trn over the year. If theregulators reach their ‘soft target’ (one-third of new loans), the private sector’s loans outstandingwill grow by RMB6.1trn over the year. This suggests a meaningful improvement of aroundRMB1.5trn in additional loans. The improvement could be larger if there is a pick-up in overallloan growth as a result of further easing of monetary conditions.Chart 3. Bank lending still favours SOE’sChart 4. The private sector accounts forless than 10% of corporate bond issuanceSource: CEIC, HSBCSource: Wind, CEIC, HSBC0 5 10 15 20 25 30 35 40 452010 2011 2012 2013 2014 2015 2016 20172018E2019F Lending to SOEsLending to private businesses % of total bank loans 0 10 20 30 40 50 60 70 80 90 100 20142015201620172018 SOEPrivate businesses % of grosscorporate bond issuance 。。。。。。