A new report from one of China’s leading think tanks sheds light on the state of the country’s deleveraging efforts in the second quarter.
The “China Deleveraging Progress Second Quarter Report” (中国去杠杆进程二季度报告) released by the National Institution for Finance and Development (NIFD) (国家金融与发展实验室) on 18 September points to a modest rise in the leverage ratio of the real economy last quarter.
According to the report as of the end of the second quarter the leverage ratio of China’s real economy – comprised of households, non-financial enterprises and the government, rose to 242.7% from 242.1% at the end of 2017, for an increase of 0.6 percentage points.
The report said that this modest growth rate marks a sharp deceleration in leverage levels following a prior period of rapid growth.
Zhang Xiaojing (张晓晶), NIFD chair, said that in 2018 the leverage ratio can be expected to rise by between 1 – 2 percentage points in total.
“The leverage ratio will still rise, but growth will ease,” said Zhang.
When broken down by sector non-financial enterprises and the government both saw a decline in their leverage ratios, while the household sector saw easing growth, lifting by 2.0 percentage points in the first half to hit 51.0% as of the end of the second quarter.
Zhang Xiaojing said that household leverage growth is expected to ease in future following slowing growth in home loans.
According to the report the financial leverage ratio has already fallen to 2014 levels.
Corporate leverage has declined continuously since hitting a peak of 160.9% in the first quarter of 2017, dropping to 156.4% as of the end of the second quarter for a decline of 0.6 percentage points since the start of 2018.
2018 has seen a marked divergence in the leverage of state-owend and private enterprises, however, with SOE’s deleveraging and private enterprises becoming more indebted.
According to Zhang SOE deleveraging is largely due to improvements to revenues or assets, while gains in the leverage of private companies is the result of “passive leveraging” amidst a worsening financial environment and the crowding-out effect of SOE’s.
“The main reasons for the divergence in state-owned and private enterprise deleveraging are: profit squeezes and financial discrimination. This has caused many private enterprises to gradually ‘seek refuge’ with SOE’s,” said economist Ren Zeping (任泽平) according to a report from 21st Century Business Herald.
“For China, effective deleveraging is not simply gentle, inflationary deleveraging, but also requires the resolution of background structural and systemic issues, and eventually achieving an increase in the efficiency of market allocations.”
The Chinese government’s overall leverage ratio was 35.3% as of the end of the second quarter, for a decline of 0.8 percentage points since the start of the year.
NIFD also reports, however, that the leverage ratio of the central government was 15.9%, for a decline of 0.3 percentage points, while that of local government was 19.9%, for a decline of 0.5 percentage points.
Local government leverage is expected to see a modest increase in the second half as the issuance of special bonds accelerates and the debt-bond swap process draws to a close.
Zhang said that the government should consider an increase leverage in the near-term, given that household leverage growth has already reached its limit, as well as the pall cast by Sino-US trade tensions upon the Chinese economy.
According to Zhang the Chinese government possesses a large volume of assets that can serve as surety for its debt, while the central government has room to increase its leverage ratio given its current low reading, and the hidden debt of local government is gradually becoming apparent.
NIFD director Li Yang (李扬) said that optimisation of the deleveraging process should focus on three key areas:
i) Avoiding a return to the old model of guaranteed growth and leverage;
ii) Use of efficiency improvements as a sustainable driver of deleveraging;
iii) Stable growth must be “reconciled” with expediting reform and risk prevention.
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