Stable leverage ratio key to reducing risks during recovery

The State Council, China’s Cabinet, said at a recent executive meeting that the country’s macro leverage ratio will be kept basically stable and the government’s leverage should be lowered.

The move is aimed at meeting the targets set in this year’s Government Work Report and is in line with the goals of the 14th Five-Year Plan (2021-25) and the long-range objectives through the year 2035. The idea is to reduce the ratio slightly after stabilizing it.

Macro leverage ratio is usually the ratio of debt balance of a certain sector in the macro economy to the GDP. It includes the leverage ratios in the financial, household, non-financial enterprise, and government sectors.

In recent years, China’s regulators have effectively defused local government debt risks, eliminated a number of major financial risks, and completed the major targets and tasks to overcome major risks.

The high growth of China’s macro leverage ratio has been basically curbed, the deleveraging pressure of non-financial enterprises effectively eased, and the process of expanding financial assets fundamentally reversed.

To strike a balance between economic recovery and risks prevention, the authorities should stabilize the macro leverage ratio, keep a close eye on the four types of leverage ratios, understand the nature of current debt risks, and take measures to overcome them.

Since last year, the debts in the household sector have increased considerably.

As an important counter-cyclical adjustment, the government sector has increased its leverage ratio at a relatively fast pace over the past year. Some local governments with relatively high debt burdens have gone to great lengths to hide their debts. Compared with the “visible government debts”, it is difficult to accurately calculate the size of “invisible debts”.

By lowering the government’s leverage ratio, the authorities intend to lower the leverage ratio in the government sector, especially the hidden debt risks of local governments.

On the one hand, the launch of new projects that can increase the hidden debts should be banned and providing illegal financing for local governments prohibited.

On the other hand, the authorities should be vigilant against “invisible” local debt risks and take necessary measures to improve the marketbased and law-based debt default disposal mechanism.