Remarks made by President Xi Jinping at the National Financial Work Conference last weekend point to a stepping up of efforts to deleverage China’s vast state-owned enterprise sector.
Speaking at the July 14-15 conference Xi said that curbing SOE leverage would be “the priority of priorities,” while also proposing a new life time accountability system for officials when it came to local government debt.
Cutting down on debt levels in the SOE sector will pose an immense challenge to regulators and policymakers, however, given its scale as well as the fact that the financial sector has long been beholden to the imperatives of the public sector, channelling huge amounts of funds to government companies that are far less efficient than their private sector peers.
The ability of state-owned enterprises to commandeer funds from the finance and banking sectors has long acted on a drag on China’s credit efficiency.
According to figures from the International Monetary Fund China’s incremental capital-output ratio has recently worsened to over 6, which means that the creation of 1 yuan of extra output requires the investment of 6 yuan. This figures compares to an ICOR of 3.2 for Japan during its own rapid development phase half a century ago.
Analysts say that the strong performance of the Chinese economy in the first half of 2017 will give Beijing breathing space to forge ahead with their deleveraging campaign, however, and curb the debt levels of its state-owned behemoths.
China’s official GDP saw growth of 6.9% in the first half of 2017, edging ahead of consensus forecasts by analysts.
“Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more through campaign,” said Helen Qiao, chief greater China economist at Bank of America Merill Lynch in Hong Kong to Bloomberg.
“We will see more measures being rolled out in the second half of 2017 and 2018.”