19 March 2019
China's high leverage ratio puts the economy at a high-risk position. Photo: Bloomberg
China's high leverage ratio puts the economy at a high-risk position. Photo: Bloomberg

China’s deleverage dilemma

China has been trying to deleverage to avoid financial risks.

However, given the downward pressure on the economy, the authorities appear to be starting to raise the leverage ratio again.

By the end of 2015, debt owed by Chinese authorities now account for 57.37 percent of the gross domestic product, the residential sector accounts for 39.95 percent and the non-financial institutions 166.3 percent.

The combined debt to GDP ratio was about 263.62 percent. The level is only a bit lower than that of Japan and Europe, and is much higher than that of other emerging economies.

The high leverage ratio puts the economy at a high-risk position.

But the most effective way to deleverage is either by increasing the GDP base or tightening credit expansion.

Given the difficulty of raising the GDP base, the other recourse is obvious.

The latest data shows that new loans issued in the first quarter rose 25 percent from a year earlier to 4.61 trillion yuan (US$710 billion). It’s higher than the market estimate.

The market attitude towards a rebound in leverage is negative.

George Soros said the crazy growth of credit in China in March looks similar to those days in 2007 and 2008 when the financial crisis was about to break out.

The government is paying too much attention to economic growth but not providing enough supervision to its debt issues.

I believe the government does understand the risks of high leverage, but it doesn’t seem to have any choice.

It released a debt-to-equity swap plan, expecting to lower the overall debt ratio.

A study by a mainland brokerage said the overall leverage of A-share companies has been stable in recent years.

The industries with growing leverage are the real estate sector, some service businesses and the emerging industries, while those with decreasing leverage levels are suffering from overcapacity.

Such a transformation is very positive.

Although many hold a negative outlook of China’s economy, they really have no need to worry too much.

The government can still control the situation, given the economy is not yet a totally free market.

This article appeared in the Hong Kong Economic Journal on April 22.

Translation by Myssie You

[Chinese version 中文版]

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HKEJ columnist

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