Chinese Central Bank’s Official Newspaper Calls for Across-the-Board Deleveraging

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The flagship news publication of the People’s Bank of China (PBOC) has called for leverage ratios to be kept under control in the government, state-owned enterprise and real estate sectors.

In an article entitled “Control the Three Main Forms of Macro-leverage, Advance High-quality Economic Growth” (控制三大主体宏观杠杆率 推动经济高质量发展) published by PBOC’s Financial News, Xu Beibei ( 徐贝贝) points out that “China’s economic structural adjustments and reforms face new challenges following the emergence of external pressures such as instability in emerging financial markets and Sino-US trade frictions.”

The publication of the PBOC article arrives following a shift in the central bank’s monetary policy stance to “rationally ample” from “rationally stable,” as well as the flagging of more robust stimulus measures and credit extension by Beijing to shore up the Chinese economy amidst escalating Sino-US trade tensions.

The PBOC article nonetheless reiterates the need to drive further deleveraging in the government, state-owned enterprise and real estate sectors.

It quotes Zhou Yanli (周延礼), former vice-chair of the China Insurance Regulatory Commission (CIRC), as saying that “reducing government sector leverage ratios is a key project for deleveraging.”

Zhou highlights several factors that continue to drive government leverage ratios higher including:

i) Local government bearing the task of driving local economic growth, in tandem with a misallocation of fiscal and market rights, leading to the large-scale formation of local government refinancing platforms and debt increases;

ii) The implementation of counter-cyclical leveraging measures by government in order to stabilise the economy and employment amidst heavy downward pressure on the economy;

iii) The indirect financing market causing severe “segregation” of Chinese financial markets with the real economy seeing low rates of return, which is also an endogenous reason for high corporate leverage.

With regard to SOE deleveraging, Zhou said that regulators need to first determine which loss-incurring companies are the result of market “clearance” or are even zombie enterprises, and which are enterprises that continue to retain growth potential despite high debt ratios.

Should SOE’s belong to the later category, Zhou said deleveraging work should continue.

With regard to real estate deleveraging, the PBOC article highlights the effectiveness of the “German prescription” as a means of averting market bubbles

“The real estate markets of many countries around the world have problems with bubbles, but Germany is the exception,” said the chief representative of the German International Cooperative Agency in China (GIZ).

“From the 1970’s until now, the German real estate price index has been basically stable…..the biggest difference compared to the real estate financing of other countries is that German interest rates are extremely stable, while the loan and real estate price ratio tends to be low, at around 60%.”

The PBOC article also highlights the establishment of a strong tenant protection system in Germany, which confers greater protections the longer the period of residency.

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