China’s deleveraging gives leeway for possible easing
The Chinese economy is facing a rough road in the second half of this year. The debt risk needs to be tamed, the pain of structural adjustment will be stronger, and the trade frictions triggered by the US are likely to continue. These have added uncertainties to the future of the Chinese economy. Ensuring the right macroeconomic policy to be adopted is a great challenge for the policymakers.
So far, the central government hasn’t steered away from its original prudent and neutral monetary policy and proactive fiscal policy. But the policies will have to change according to the economic situation. If the downward pressure on the economy is overwhelming, the macroeconomic policy will have to change and leave some space for future adjustment.
Ruan Jianhong, head of the Statistics and Analysis Department at the People’s Bank of China has stated in an article that since 2017, the growth of China’s leverage ratio has substantially slowed, dropping from an average of 10.9 percent annual growth rate in 2012-2016 to 2.4 percent in 2017. Enterprise, fiscal and household income has seen a steady increase, which helps cancel out current debt. Prudent and neutral monetary policy and stronger financial regulation have also contributed to the low rate.
This new situation has allowed the monetary tightening to be altered while keeping the debt ratio stable.
The leverage is better structured than before. First, the leverage ratio in businesses has been falling, as well as the debt ratio in State-owned enterprises. The business leverage ratio in 2017 has lowered 1.4 percent compared with 2016. The debt-to-asset ratio in Stateowned enterprises has dropped steadily.
Second, the marginal growth rate of the household leverage ratio has also slowed, and the debt safety is manageable. By the end of May, the growth rate of China’s household debt had fallen for 13 consecutive months. At the end of 2017, the ratio of personal loans to deposits was 62.1 percent, which means personal savings can fully cover the debt. House mortgages only account for 58.3 percent of the value of their collateral with an average contract length of 272 months. Therefore, the liquidity risk is under control.
Third, the government leverage ratio fell 0.4 percent in 2017 in the third year of a downward trend. The local government leverage ratio is 19.9 percent, 0.7 percent lower than 2016.
It seems that the Chinese government’s deleveraging effort has made some headway. And the current economic risk has gradually changed from high leverage to inadequate economic growth. If the situation in the upcoming half year shows different signs, macroeconomic policy will have to change.
New fiscal and financial policies were released on July 23. First, a more proactive fiscal policy is needed, focusing on lowering taxes and fees. The tax and fee reduction for market entities should reach 1.1 trillion yuan ($160 billion) and the 75-percent deduction rate on R&D costs should cover all companies, not limited to small and medium innovative enterprises. Policies also include speeding up the issuing and usage of 1.35 trillion yuan of local government special bonds.
Second, prudent monetary policy needs to be kept at a level that still is able to provide enough financing and a reasonable liquidity. Third, the national financing guarantee fund will have to meet the target of supporting 15,000 small and medium enterprises by leveraging 140 billion yuan of loans. Fourth, “zombie companies” will have to be bankrupted.
The policies above have created an environment to end policy tightening and switch to policies to keep the economy growing, mobilize the market, facilitate domestic demand and increase investment with accumulated resources. More major policies are expected to be released and put into practice soon.
It seems that the Chinese government’s deleveraging effort has made some headway. And the current economic risk has gradually changed from high leverage to inadequate economic growth.