“China Can No Longer Rely Upon Artificial Leverage Gains to Chase High Speed Growth:” Liu Shimian

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A member of the Chinese central bank’s monetary policy committee has stressed Beijing’s commitment to containing leverage.

China recently launched a heavy-handed deleveraging campaign, which began to yield pronounced results last year.

In 2017 China’s debt-GDP ratio began to post easing growth, while in the first quarter of 2018 it rose by 0.9 percentage points compared to last year, for a year-on-year deceleration of 1.1 percentage points.

Liu Shimian (刘世锦),  vice-director of the China Development Research Foundation and a member of the People’s Bank of China’s monetary policy committee, said to Caijing that Beijing would continue to drive deleveraging of the economy.

“In future China’s leverage ratios will remain stable overall,” said Liu. “Following China’s entry into  a high-quality growth phase, factors that drive increases in leverage ratios are currently undergoing major change.”

Liu said that these changes included:

i) A transition from high-speed to high-quality growth, with increases in total factor productivity playing a key role, and greater attention paid to indices such as employment, enterprise profitability, and stable and sustainable growth.

“[China] can no longer use artificial increases in leverage ratios to pursue high-speed growth.”

ii) The “monetisation” of China’s goods and factors has already reached a high level, and following the ageing of the population and slowing urbanisation this monetisation process will start to decelerate, which will have an impact upon leverage ratios.

iii) Heightened financial regulation and steady improvements to financial markets, which is having major impacts upon rising leverage.

iv) Strengthening of curbs on local government debt, in particular the “clean up” of hidden local government debt, as well as greater standardisation of financing.

v) Major progress in the removal of excess capacity, contraction of the supply-demand gap, strengthening of the profitability and sustainability of companies.

Liu also pointed to three key reasons behind the overall trend of easing economic leverage of late:

i) Supply-side structural reforms have seen marked success, with enterprise profits and fiscal revenues maintaining comparatively rapid growth, which was of help to dissolving outstanding debt;

ii) Stable and neutral monetary policy as well as structured lending policies. Both  money and credit had maintained moderate overall growth.

iii) Local government financing and guarantees had been further standardised, while their financing platforms had seen debt growth contained.

According to Liu China’s leverage ratios had seen comparatively rapid growth in the preceding period, leading to a mismatch when it came to savers and investors, and a comparatively low equity financing ratio.

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