Leverage ratio in the real economy sector has risen slightly, while that ratio in financial sector has dropped to the level in 2014. Leverage ratio of non-financial enterprises has declined for five quarters consecutively, presenting a gap between state-owned enterprises (SOEs) and private enterprises. However, the most significant change in government sector is its recessive leverage ratio decreased, according to report on China’s deleverage released on September 18.
Noticeably, with the influence of macro-situation, current policies of deleverage see slight adjustment. Experts suggest that the government should avoid applying the former model of maintaining economic growth by leverage when adjusting the policy, and persist in deleverage via efficiency and improvement. The fundamental solution is to adopt “withdrawal mechanism”.
The Central Economic Working Conference held at the end of last year considered preventing and guarding against major risks as one of the tough tasks, and took a series of measures. The report showed that leverage ratio of real economy including household, non-financial enterprises and government department moved up from 242.1 percent in late 207 to 242.7 percent. Specifically, household leverage ratio is still climbing, which has surged by 2 percentage points in the first half of this year, while ratio of non-financial enterprises and government departments dropped from 157 percent and 36.2 percent to 156.4 percent and to 35.3 percent, respectively.
It is worth noting that there exists wide polarization between deleverage situation of SOEs and private enterprises. Private industrial enterprises saw obvious effect in leverage with their asset-liability ratio up from 51.6 percent in late 2017 to 55.8 percent, while asset-liability of SOEs fell from 65.7 percent in late 2017 to 65 percent.
Liu Lei, senior researcher with Center for National Balance Sheet, viewed that enterprises sector faced the problem with higher leverage ratio in non-financial enterprises due to too high total asset, low production efficiency and high saving rate of non-financial enterprises. The increasing asset-liability of private enterprises was a result of sharp decrease in assets.
Asset-liability ratio in SOEs has decreased. To some degree, it is due to decrease in liabilities. But larger contribution comes from the rising assets. SOEs cannot compete with private enterprises in generating income. Debt-to-income ratio in SOEs reaches as high as 200 percent, which is higher than the leverage ratio of non-financial enterprises (156 percent). From the perspective of solvency, SOEs still face high debt risk.
Li Yang, a member of the Chinese Academy of Social Sciences and chairman of the National Financial and Development Laboratory, believes that de-leveraging should be carried out through a variety of policies. There are several issues to be paid attention to. First, avoid returning to the old model of maintaining growth and adding leverage, especially to prevent disguised leverage, and returning to the old growth model which is driven by real estate and infrastructure. Secondly, de-leveraging of non-financial enterprises, especially state-owned enterprises, is still the key to structural de-leverage. Thirdly, to achieve perfect de-leverage, it should allow debt-clearing mechanisms to play a role.
Zhang Xiaojing, deputy director of the National Finance and Development Research Office and director of the National Balance Sheet Research Center, pointed out that the fundamental way to deleveraging is to adopt an “exit mechanism”. "Promoting bankruptcy and restructuring, letting the market clean-up mechanism play a role, breaking the government's illusion, hardening constraints, and promoting market-sharing of leverage risk."
The report suggests that while reducing the implicit debt of local governments, it should increase explicit debt; that is, increase the limit of general debt and special debt to maintain the stability of local government investment spending. Meanwhile, there is still large space for de-leverage.
Zhang Xiaojing believes that giving the fact that household leverage ratio has risen to a limit, it is necessary and controllable to moderately increase the government's leverage ratio. The goal of de-leveraging is to let the financial industry serve the real economy, to eliminate regulatory arbitrage.
Translated by Coral Zhong and Vanessa Chen
Translated by Coral Zhong & Vanessa Chen