SCIO briefing on the 'new normal' in the Chinese economy and deepening supply-side structural reform
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E-mail China.org.cn, January 10, 2017
China News Service:
The public is concerned about China's debt ratio and the corporate sector's leverage ratio. There are opinions that a high leverage ratio is a major risk that China faces. Therefore, I would like to ask how is the development of the market-based debt-to-equity swap. Thank you.
Xu Shaoshi:
We notice the Bank for International Settlements, the International Monetary Fund (IMF) and the Chinese Academy of Social Sciences (CASS) have all worked on calculations of China's leverage rate, each producing a different result. However, the following several conclusions are largely consistent. First, China's overall leverage ratio is being held at a medium level among major economies; it's not noticeably higher than others. This conclusion is shared by those aforementioned institutions. The rate is around 250 percent, largely on par with that of the United States, but lower than that of Japan, Spain, France and the United Kingdom.
Second, China's leverage ratios for the government and resident sectors are both the lowest among major economies. The leverage ratio for the government is probably only 40 percent and that of the resident sector is the same; the central government has a leverage ratio of merely 16 percent, although the figure for local government is slightly higher.
Third, enterprises in the non-financial sector feature a higher leverage ratio, a fact agreed on by different agencies. The figure is around 150 percent, which is higher than other major economies. Speaking of the leverage rate for the government, one fact you should notice is that a considerable portion of the government debt has been transformed into high-quality assets.
As for China's debt issue of concern to the outside world, I think they should regard the issue within the context of China's actual conditions and try to understand it from three perspectives. First, China's debt is supported by a high deposit rate, which has constantly been maintained at around 50 percent, noticeably higher than other countries. The deposits are stable in nature. Leverage in a high-deposit environment is less likely to trigger systemic risk. This is one way in which we differ from other economies.
Second, China's debt is mostly internal in nature; we have fairly low external debt. Non-financial enterprises only display an external debt ratio of around four percent. International experience shows external debts are more likely to trigger a debt crisis.
Third, the high enterprise leverage ratio is linked to Chinese financing methods. Since our capital market is less developed, a large portion of financing in China is realized through bank loans – indirect financing. We have a low rate of direct financing, such as equity financing. This is why the enterprise sector has a higher debt ratio.
This issue needs close attention, however. I have two points I want to make. First, we, as regulators, should actively seek to lower the corporate sector's leverage ratio to avoid risk. Second, we don't have to worry excessively. Last October, the country published documents on actively, but prudently lowering the corporate sector's leverage rate, which drew an active response from banks, agencies and enterprises. Before the document was published, simulations were undertaken for more than two months, after which the document was published, when we saw breakthroughs as follows.
Some affiliated agencies to the four major state-owned banks – Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and China Construction Bank (CCB) – as well as some capital management companies signed framework deals for market-based debt-to-equity swaps with 23 enterprises in the coal, steel, non-ferrous metal, construction and transport sectors. These deals totaled more than 300 billion yuan, and we regard them as a most hopeful sign.
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