May 29, 2019 08:07 PM

China Sees Setback in Efforts to Keep Debt in Check

Construction workers build a high speed railway in East China's Jiangsu province on May 3. Photo: IC Photo
Construction workers build a high speed railway in East China's Jiangsu province on May 3. Photo: IC Photo

There’s no such thing as a free lunch and that also applies to economic growth. Although China’s gross domestic product (GDP) rose by a better-than-expected 6.4% year-on-year in the first quarter, the achievement came at the cost of a renewed surge in borrowing that took a closely watched indicator of the country’s indebtedness to a record high.

China’s overall leverage ratio, which measures outstanding debt in the real economy against nominal GDP, increased to 248.83% at the end of March, the highest in a data series going back to 1993. That’s according to a joint study released on Tuesday by two Beijing-based state-backed think tanks — the National Institution for Finance & Development (NIFD) and the Institute of Economics under the Chinese Academy of Social Sciences.

The debt-to-GDP ratio was up 3.73 percentage points from the same period a year earlier and 5.1 percentage points higher than at the end of 2018, largely due to a shift in the focus of government policy toward stabilizing economic growth, the report said. The 6.4% pace of GDP expansion in the first quarter was unchanged from the final three months of 2018 and ended a run of three consecutive quarters of slowing growth.

“The increase (in the leverage ratio) was very rapid,” Zhang Xiaojing, deputy director of the Institute of Economics and the NIFD, said at a briefing to discuss the report, “If it continues at this pace, China risks returning to the days of double-digit annual growth in its leverage ratio.” NIFD data show that the annual growth in the country’s debt-to-GDP ratio ranged from 10.1 percentage points to 14.6 percentage points in the five years to 2016.

SOEs loom large

China’s debt-to-GDP ratio, which measures the level of its indebtedness in relation to the size of its economy, jumped by 73% in the decade after 2008 as the government opened the lending taps to cushion the country from the impact of the global financial crisis. The annual pace of growth began to subside from 2016 when policymakers, concerned about the scale of the country’s debt burden, began a campaign to control leverage starting in the financial sector.

The end-2018 debt-to-GDP ratio of 243.7% was the first annual decline since 2011, according to NIFD data.

The report attributed most of the increase in leverage in the first-quarter to higher borrowing in the nonfinancial sector driven mainly by state-owned enterprises (SOEs). Their total debt rose by 15% year-on-year in the first quarter, far outpacing the 5.6% gain seen in the industrial sector overall which is dominated by private companies, the report said. At the end of March, SOEs accounted for 68.2% of all nonfinancial corporate debt, up from 66.9% at the end of 2018.

The faster increase in SOE debt came despite a central government campaign to support the private sector that included urging banks to boost lending to small and midsized enterprises amid concerns a lack of access to borrowing was hampering their growth.

“A recovery in China’s economy will depend on the vigor of private enterprises and the prerequisites for that to happen are (to create a stable environment for) expectations, normal investment, start-ups and hiring,” Li Yang, president of NIFD, said at the conference. “But from the state of their liabilities, we haven’t yet reached that point.”

The report showed that the central government’s leverage ratio dropped to 16.2% from 16.5% at the end of 2018. But local governments saw their leverage increase to 21.4% from 20.4%, a level not seen since the final quarter of 2015, as they boosted bond sales to finance infrastructure investment as part of efforts to stabilize economic growth. The value of bonds issued by local governments in the first three months of 2019 rose to 1.4 trillion yuan from 219.5 billion yuan in the same period last year as the central authorities broke with past practice and gave them the go-ahead to begin selling debt earlier in the year than usual.

To support investment amid slowing economic growth, the central government has also taken a more relaxed stance toward borrowing by local government financing vehicles (LGFVs), special companies set up by local governments to raise money to fund infrastructure. That contributed to a 300-billion-yuan bond-selling spree by LGFVs in the first quarter, compared with just 500 billion yuan raised in the whole of 2018.

Household debt boom

The debt taken on by Chinese households is also increasing, with household leverage expressed as a percentage of nominal GDP rising to a record 54.3% in the first quarter from 53.2% at the end of 2018 and double the level at the end of 2010, NFID data show.

Li noted that if the household leverage ratio is calculated using disposable income rather than nominal GDP, it would be “very close” to the level seen in the U.S. before the 2008 financial crisis.

The report highlighted that a major driver of consumer debt has been short-term loans driven by the rapid development of fintech, banks’ retail businesses and the increasing willingness of the younger generation to borrow. But it warned that such loans have a relatively higher nonperforming ratio than other types of household borrowing.

Contact reporter Liu Jiefei (

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