Despite the downgrading of China’s sovereign credit rating earlier this year by Moody’s and S&P, political leaders have hailed the success of the country’s ongoing deleveraging campaign during the 19th National Chinese Communist Party Congress.
Tuo Zhen, media spokesman for the 19th National CCP Congress, said that China’s deleveraging campaign “had already achieved initial successes, without any pronounced tightening effects upon economic output.”
According to Tuo policymakers had “upheld active and appropriate deleveraging…[used] multiple measures to deleverage, and appropriately handled the relationship between stable growth and deleveraging, to ensure that deleveraging does not have a negative impact upon economic growth.”
Tuo’s remarks echo those made by central bank governor Zhou Xiaochuan, who said at a recent IMF forum that “money supply and credit data show that China entered the deleveraging process at the start of the year.”
“Broad M2 money supply growth continues to ease, and is currently under 9%,” said Zhou. “The overall leverage ratio has started to decline. While the amount isn’t large, the trend has already been established.
“After the Great Financial Crisis China began to implement active fiscal and money policies in response, so for the two years after 2009 China’s debt-GDP ratio saw large scale increases.
“This was worth it, however, because the Chinese economy recovered rapidly from crisis. Now, China must reduce its leverage ratios.”
Outside observers and analysts differ markedly in their estimates of the precise extent of Chinese leverage, given the difficulty of obtaining accurate and authoritative data.
China’s official media has been wont to cite data from the Bank of International Settlements, which puts China’s total leverage ratio at 257.8% as of the end of the first quarter, for deceleration in year-on-year growth of 4.7 percentage points compared to the preceding quarter, and the fourth consecutive quarter of easing expansion.
Other analysts believe China’s leverage levels are far higher, such as Victor Shih from the University of California, San Diego, who estimates that China’s total credit hit around 254 trillion yuan as of May this year, or 329% of 2016 nominal GDP.
Analysts within China point out that the country’s levels are distinguished by certain structural features, including comparatively low government and household debt as a share of GDP, and the dominance of corporate sector debt.
“China’s corporate sector leverage is comparatively high, and the problem here is a low direct financing ratio, with enterprises dependant upon loans, and an excessively high debt financing ratio,” said Zhou Xiaochuan.
“There also a definite problem with an insufficient capital efficiency amongst enterprises, including returns on investment and use of circulating capital. For this reason, we place especially heavy emphasis upon supply-side reforms.”
Zeng Gang, chair of the banking research office of the financial research faculty of the Chinese Academy of Social sciences, said to Economic Information Daily that corporate deleveraging remained the “priority of priorities,” as previously emphasised by both President Xi Jinping at the National Financial Work Conference and more recently by China’s State Council.
According to Zeng the steady deleveraging of state-owned enterprises will be a focal point for future policy work, while an orderly and measured deleveraged must be achieved via measures including debt-equity swaps, optimisation of debt structures and withdrawal from zombie enterprises.