Leverage Risk Concentrated amongst State-owned Enterprises, Local Government: Chinese Academy of Social Sciences


One of China’s leading think tanks has warned of the dangers of excessive leverage amongst state-owned enterprises (SOE) and local governments.

Speaking at the 2019 China Economics 50 Forum (中国经济50人论坛) on 16 February Zhang Xiaojing (张晓晶), vice-head of the Chinese Academy of Social Sciences Economic Research Institute, said that leverage risk was primarily concentrated amongst SOE’s and local government.

In 2018 the overall leverage ratio (debt-to-GDP ratio) of China’s real economy was 243.7%, with the household leverage ratio standing at 53.2%, corporate leverage at 153.6% and government leverage at 37%.

According to Zhang the SOE leverage ratio has hit 103%, most of which is comprised of financial platform debt which should be calculated at the books of local government.

The combined SOE and government leverage ratio is 139.8%, accounting for nearly 60% of all debt in the real economy.

Zhang said that the reasons behind SOE and local government leverage risk include soft budget constraints, lack of a clear divide between government and enterprise, the perception of central government guarantees and the institutional preferences of the financial system.

“These are all defects of the traditional system…the dominance of indirect financing isn’t the main reason for high leverage amongst enterprises,” said Zhang. “For example Germany is also dominated by indirect financing, but corporate leverage is less than 60%.”

Zhang recommends deleveraging that “seeks progress amidst stability,” which will require further closure and reorganisation of “zombie enterprises” as well as pushing the market to play a greater role in cleaning up industries.

Zhang also called for toughening budgetary restraints for SOE’s and local government, removing the false impression of central government guarantees, emphasising competitive neutrality, and correct the institutional preferences of the Chinese financial system.