Deleveraging is the Long-term Mission: National Institution for Finance and Development


The head of one of China’s leading economic think tanks has reiterated the need to pursue deleveraging efforts over the long haul.

Li Yang (李扬), head of the National Institution for Finance and Development and a member of the Chinese Academy of Social Sciences, said that reports that China’s deleveraging campaign has already reached an end are premature.

“It seems as though there are some people who say that deleveraging has concluded, and that in future we will no longer do this,” said Li at the annual China Entrepreneurs Summit (中国企业家高峰论坛) held by Fudan University’s EMBA program on 8 December.

“This is wrong….deleveraging is the long-term mission, and if this matter cannot be effectively completed, sooner or later manifest risk will be revealed.”

According to Li China’s slowing economy in tandem with uncertainties in the external environment have made the mission of deleveraging more complex, and for this reason prolonged the time required to achieve it.

“During this process we must effectively grasp opportunities, rhythms, paces and adjustments…this is a long-term affair.”

Given that deleveraging is the root cause of macro-financial fragility, Li said that the deleveraging of Chinese enterprises, “zombie enterprises” and local governments is the “priority of priorities” over for the indefinite future..

According to the “China Financial Stability Report (2018)” (中国金融稳定报告(2018)) issued by the People’s Bank of China, China’s macro-leverage ratio was 248.9% as of the end of 2017, as compared to 251.2% for the United States, 258.3% for the Eurozone, 151.7% for Brazil and 124.3% for India.

Deleveraging efforts launched by Beijing nonetheless proved effective at containing the rate of debt growth, with the 2017 leverage ratio growth rate 10.9 percentage points lower than the average annual growth rate for the period from 2012 to 2016.

As of the end of 2017 the leverage ratio of China’s non-financial enterprise sector was 163.6% – the highest for any major economy, accounting for a 65.7% share of the country’s macro-leverage.

The comparable figures for the Eurozone, Japan and the United States were 101.6%, 103.4% and 73.5% respectively.

During the decade-long period from 2007 to 2017, China non-financial enterprise sector leverage ratio saw continuous increases, rising by 65.9 percentage points.

State-owned enterprises are especially indebted, with the average debt-asset ratio of China’s state-owned industrial enterprises above designated size reaching 60.4% as of the end of 2017, or 4.9 percentage points higher than the average for all industrial enterprises in China above designated size.

Li Yang also said that it has become extremely difficult to deal with local government debt given that administrative pressures have compelled them to pursue financing despite the risk of regulatory breaches.

“In order to resolve local government debt, it is necessary to sort out the relationship between government and markets, as well as the administrative and fiscal relationship between central government and local government.”