China’s central government says that the growth of the country’s total debt levels is gradually easing as regulators forge ahead with a concerted deleveraging campaign.
A report published by National Development and Reform Commission on 25 September cites the latest data from the Bank of International Settlements indicating that as of the end of the first quarter of 2017 China’s total debt was equal to 257.8% of GDP.
A research report released by Dongwu Securities (东吴证券) notes that the leverage rate of China’s real economy was 251.18% of GDP 2016, which it believes is still within the “safe zone” for emerging economies at China’s current stage of development.
According to the NDRC the year-on-year growth in China’s national leverage ratio for the first quarter fell by 4.7 percentage points compared to the preceding quarter, marking the fourth consecutive quarter of decelerating growth.
First quarter national debt-to-GDP ratio also saw month-on-month growth ease by 0.8 percentage points, for the fifth consecutive quarter of decline.
The NDRC report notes that China’s corporate leverage rate is declining, with the latest BIS data indicating that as of the end of Q1 2017 China’s non-finance corporate debt was 165.3% of GDP, marking the third consecutive quarter that the level has declined or held steady compared to the preceding month.
NDRC further points out that China’s credit-to-GDP gap, which is defined by BIS as the difference between the credit-to-GDP ratio and its long-run trend, is continuing to decline, falling to 22.1% as of the end of Q1 2017 for a 2.4 percentage point slide compared to the end of 2016 and the fourth consecutive quarter of decline.
More recent data cited by NDRC points to the ongoing effectiveness of China’s deleveraging campaign past the end of the first quarter.
As of the end of July 2017 the debt ratio of China’s enterprises above designated size was 55.8%, for a year-on-year decline of 0.7 percentage points, while profit rates for their main operations rose to above 6%, as profit growth lifted to 20%.
Domestic analysts note, however, that leverage levels by sector remain highly variable, a report just released by the China Iron and Steel Association indicating that the total debt of the association’s corporate membership was 3.4346 trillion yuan as of the end of June, for an average debt ratio of 70%.
Zhao Xijun, vice-head of Renmin University’s School of Economics and Finance said to National Business Daily that the key thing in future would be the implementation of more “refined” deleveraging based on region and sector.
“Irrational, speculative leverage definitely must go, and excessively high leverage must be reduced,” said Zhao.
“[We] must differentiate our treatment of the leverage levels of the real economy, government, households, financial institutions and other different sectors, and make adjustments to leverage whose term or denomination structures are irrational.”
NDRC has indicated that reducing the leverage ratios of China’s immense state-owned enterprise sector by means of “systemic mechanisms” will be a primary focal point in future, as part of a broad raft of policies that include mixed-ownership reforms, improvements to corporate governance, and the establishment of a debt warning and control system that is differentiated on the basis of sector.
NDRC said that the liquidation of China’s “zombie” enterprises would be a key means of reducing leverage, while debt-equity swaps would also serve as an important tool for cutting corporate debt levels in order to further support SOE merger and restructuring work.
Domestic analysts expect any merger and restructuring measures to be concentrated in those sectors where problems with overcapacity and debt are especially severe, including coal, heavy equipment, energy and steel.
Mixed-ownership reforms will target monopolistic sectors such as shipping, telecommunications, rail and defence, while debt-equity swaps will benefits those enterprises that are heavily indebted yet possess strong growth prospectus.