Just an alarmist rumor to claim country on brink of financial crisis

WITH THE FAST RISE OF ITS LEVERAGE RATIO, some have expressed concern that China is on the verge of a debt or financial crisis. Economic Daily comments:

Statistics of the Bank for International Settlements indicate that the leverage ratio of China’s nonfinancial enterprises soared from 96 percent in 2008 to 166 percent in 2016.

Yet it is worth pointing out that the problem is a characteristic of China’s current stage of development. Indirect financing (bank credit loans) is the main form of financing in China, accounting for 70 percent to 90 percent of the market, as direct financing remains less developed. This unavoidably pushes up the leverage ratio of the whole financial sector.

In developed economies, such as the United States and Japan, equity financing is the main form of financing and debt financing accounts for less than one-third of the market.

Besides, the high leverage ratio of enterprises mainly involves State-owned enterprises, which is partially caused by the fact that either the SOEs or their creditors, mainly State-owned banks, assume certain government functions.

And, both the fast development of the real estate market, and the country’s accelerating urbanization and monetization have raised the leverage ratio of both enterprises and individuals. The shadow banking that flourishes in some places is also a power driving up the leverage ratio.

Although these challenges are practical — some are even pressing — they have not shaken the foundations of the Chinese economy, and are unlikely to trigger a financial crisis.

In fact, the prediction that China is on the verge of a financial crisis has been heard for years.

The Chinese authorities have paid close attention to the high leverage ratio, and deleveraging and risk prevention and control are regarded as important tasks.

A series of deleveraging policies have worked well. Therefore, it is far-fetched to predict that a financial crisis is looming in China.