PBOC Shifts Descriptions of Chinese Macro-leverage and Monetary Policy

The Chinese central bank has made slight adjustments to its descriptions of macro-leverage trends and monetary policy in its most recent quarterly report, replacing use of the term “deleveraging” with “structural adjustments.”

The “2018 Q1 China Monetary Policy Execution Report” (2018年第一季度中国货币政策执行报告) points out that 2017 saw a a trend of stabilising macro-leverage, and that in future China’s macro-leverage will further stabilise, while the economy will see gradual, structured deleveraging.

The official wording used by the People’s Bank of China (PBOC) to describe upcoming monetary policy has undergone slight amendment, however.

The phrase “effectively control the balance between stable growth, deleveraging and risk prevention” (把握好稳增长、去杠杆、防风险之间的平衡) employed in the previous execution report has since been changed to “effectively control the balance between stable growth, structural adjustment and risk prevention” (把握好稳增长、调结构、防风险之间的平衡), with “structural adjustment” used in lieu of “deleveraging.”

The overall theme of monetary policy as outlined by the PBOC report remains unchanged, however, with the central bank pointing to the need to “effectively control the yardstick of liquidity, in order to deleverage and prevent and resolve financial risk.”

“Comprehensive consideration must be given to changes in the macro-economy, strengthening of policy co-ordination, flexible use of a combination of multiple monetary policy tools, rational arrangements of tool combinations and operating rhythms, and maintenance of rational and stable liquidity.”

The report points out that while macro-leverage ratios saw stabilisation last year, just prior to 2017 China’s macro-leverage ratio saw rapid increases, rising by 13.5 percentage points on average per annum during the period from 2012 to 2016.

According to the report economic stabilisation in tandem with steady and neutral monetary policy achieved a marked slowdown in China’s macro-leverage growth in 2017, with a full-year rise of 2.7 percentage points to 250.3%.

The corporate sector leverage ratio was 159%, for a year-on-year decline of 0.7 percentage points, and the first decline since 2011, after rising by 8.3 percentage points per annum on average during the period from 2012 to 2016.

The government sector leverage ratio was 36.2%, for a YoY decline of 0.5 percentage points, after average growth of 1.1 percentage points per annum from 2012 to 2016.

The household leverage ratio was 55.1%, for a YoY rise of 4 percentage points, yet 0.1 percentage point behind the average growth rate for 2012 o 2016.

The report outlines three main reasons for the stabilisation of China’s macro-leverage:

i) Supply-side structural reforms have proven effective, which in tandem with a recovering global economy has led to stabilisation of the Chinese economy, and the maintenance of rapid growth in corporate, government and household revenues, helping to stabilise debt levels;

ii) Stable monetary policy and structured credit policies, the maintenance of appropriate growth in overall credit;

iii) Further standardisation of local government financing and guarantee behaviour, containment of the debt growth of financing platform companies, slowing growth in state-owned enterprise debt.

According to the report China’s economic development is entering a new phase, of gradual structured deleveraging, following the sustained rise in macro-leverage levels.

The report said that the Chinese economy’s transition from a high-speed growth phase to a high-quality growth phase will by definition require an increase in the efficiency of credit usage, which will be of aid to bringing leverage levels down.

Financial regulation will also be strengthened and financial markets further improved, which will contain the growth in shadow banking.

Other key factors including hard constraints on local government debt, as well as further supply-side structural reforms and the ongoing implementation of market-based debt-equity swaps for state-owned enterprises, which will help to stabilise or even lower macro-leverage.

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