Beijing’s ongoing deleveraging campaign appears to be proving effective, as China’s debt load as a percentage of gross domestic product declines for the first time in nearly six years.
A report recently released by JPMorgan said that China’s debt fell to 268% of GDP at the end of the second quarter, from 269% at the end of the preceding period.
The decline marks the first time in over half a decade that China’s debt-to-GDP has posted a decrease.
“The composition shift, with household debt increasing while…corporate liabilities declined, points to some progress in debt structuring,” wrote Zhu Haibin, chief economist at JP Morgan in Hong Kong.
Zhu’s figures include estimates of covert credit in addition to the debt owed by the Chinese government, enterprises and households which is reflected by official data.
Key factors behind the decline in Chinese debt include a tightening of monetary policy by the central bank as well as stricter macro-prudenital regulation of lenders.
The return of inflation over the past year also played a pivotal role, helping to reduce the debt-to-GDP ratio by raising nominal GDP.
Beijing launched a credit-fuelled stimulus program in the wake of the 2008 Great Financial Crisis to keep the economy afloat, leading to a rapid accumulation of debt over the past decade.
While the debt-to-GDP ratio was under 150% in 2007, some groups such as the Institute of International Finance estimate that the figure has since doubled to over 300%.
Despite the second quarter decline highlighted by JP Morgan, concerns still abound over China’s ballooning levels, compelling Standard & Poor’s to downgrade its sovereign credit rating by a notch just last week.
Other analysts believe that China’s deleveraging campaign and crackdown on the banking sector are proving effective at combating its debt woes.
“We think China’s debt risk has actually declined over the past year,” said Wang Tao, head of China economic research at UBS in Hong Kong to The Financial Times. “Tighter supervision and regulation have helped to curtail shadow banking growth.
“While China’s credit growth continues to outpace nominal GDP growth, the gap has actually narrowed this year.”
Wang estimates that China’s debt ratio increased one percentage point in the second quarter to hit 274% by the end of June, significant of easing credit growth.