China’s Total Leverage Has Started to Slide: Central Bank Head


The head of the People’s Bank of China says that China’s overall debt levels have started to slide as a result of the concerted deleveraging campaign launched by the central government earlier this year.

Speaking at the Group of Thirty International Banking Seminar held at the Inter-America Development Bank in Washington D.C. over the weekend, Zhou Xiaochuan said official data indicates that Chinese deleveraging has already kicked off.

“Looking at the money supply and credit data, since the start of this year China had already entered the delivering process,” said Zhou.

“M2 money supply growth has continued to slow, and is currently under 9%. The overall deleveraging rate has started to show decline. Although the amount isn’t great, the trend has nonetheless been formed.”

Zhou notes that measures undertaken to shore up Chinese growth in the wake of the Great Financial Crisis as well as changing economic circumstances have necessitated the central government’s current deleveraging drive.

“After the GFC, China began to implement pro-active fiscal policy and monetary policy in response to the crisis. As a consequence China’s debt to GDP ratio rose significantly in the two years after 2009.

“It’s worth noting, however, that the Chinese economy recovered very rapidly from the crisis. Now, China needs to reduce its leverage rate.”

The comparatively robust performance of the Chinese economy this year has provided policymakers with an opportune moment to forge ahead with deleveraging measures.

“Over the past several years China’s economic growth has continually eased. After declining from over 10% in the past to around 8% in 2012, it subsequently fell to 6.7% in 2016,” said Zhou.

“This year however economic drivers have recuperated, with GDP growth reaching 6.8% in the first half of the year, and forecasts seeing it reach 7% in the second half. The main drivers of economic growth are rapid growth in household consumption…

“Since the start of the year China’s trade performance has been comparatively strong, benefiting from improvements to the external environment.

“The commercial trade surplus is USD$400 billion, for a decline of 20% compared to the same period last year, with imports, and in particular service imports, seeing rapid growth.

“The current account balance is expected to fall to 1.2% of GDP this year, which when compared internationally, means that China’s balance of payments is quite reasonable.”

While economic circumstances have enabled policymakers to launch the deleveraging process, Zhou notes that official data point to debt levels remaining a major problem for the corporate sector, which may in fact conceal a government debt problem due to statistical methods and copious borrowing via local government finance platforms.

“China’s overall macro-leverage level is quite high. When broken down by sector, the government debt-GDP ratio isn’t that high, and the household debt-GDP continues to remain low, yet is rising rapidly,” said Zhou.

“The main problem is the comparatively high debt-GDP ratio of the corporate sector.

“Benefiting from a low interest-rate environment, the current debt servicing ratio remains quite rational.

“Many people may ask, why do corporations have such a high leverage ratio, and why are financial institutions – in particular commercial banks, willing to provide them with so many loans?

“One of the reasons, as many economists have pointed out, is that China’s local governments have used various forms of financing platforms to borrow, creating a large volume of debt.

“This shows up in the statistics as corporate sector debt, leading to a high assessment of corporate sector debt.

“If this part of the statistics were considered government debt, then corporate sector debt would fall significantly, while government debt would rise correspondingly.

“For this reason, when addressing China’s leverage ratio, we not only need to look at the debt and bank loan problems of state-owned enterprises and the rest of the corporate sector, we also need to focus on the local government debt problem.

“The later is related to the process of driving urbanisation…the International Monetary Fund has recommended to us that we earnestly research fiscal relations within government, and reform the demarcation of responsibility for fiscal receipts and payments between central and local governments.”

Zhou said that the stability of the financial system, the prevention of systemic risk and ongoing reform and deleveraging efforts would remain key priorities for China’s economic decision-makers in future.

“The National Financial Work Conference held in July this year decided to establish financial stable development commission (金融稳定发展委员会), which in future will focus on four areas,” said Zhou.

“The first is shadow banking. In actuality we already began to deal with this problem two years ago, and have achieved positive progress, with many shadow banking activities already returning to the banking sector and inclusion in the balance sheets of commercial banks.

“The second is the asset management sector. This problem is more complex, with the three regulatory bodies of the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the China Securities Regulatory Commission perhaps implementing different regulatory stipulations with respect to the one asset management industry.

“We agree with the relevant recommendations of the Financial Stability Board, with respect to the rational and streamlined regulation of the asset management sector.

“The third is Internet finance. At present many tech firms have started to provide financial products, with some companies obtaining licenses, yet some without licenses still providing lending and payment services, and selling insurance products.

“This could bring competition problems and financial stability risk.

“The fourth is financial holding companies. We have observed that some large-scale private enterprises have used acquisitions to obtain various financial services licenses, yet are not financial holding companies in the true sense.

“There perhaps exist affiliate transaction or other illegal conduct between them, yet we do not yet have corresponding regulatory policies for these cross-sector transactions.

“In future we will further deepen reform, and gradually drive economic deleveraging. A the sometime, we will strengthen financial regulatory coordination, drive the balance and healthy growth of financial markets, and maintain financial stability.”