China’s debt-to-GDP ratio falls again, but pace of deleveraging eases as economy falters

·3-min read

China’s campaign to reduce debt continued to improve in the third quarter of the year, but momentum is waning as economic growth stalls, a government-affiliated think tank says.

Defusing financial risk was one of three economic priorities set by Chinese President Xi Jinping four years ago and the nation’s leverage ratio – which measures the percentage of debt to gross domestic product (GDP) – is closely watched as an indicator of progress.

The lower the ratio, the lower the amount of debt per US dollar of national output.

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The ratio fell to 264.8 per cent in the three months to end September, from 265.4 per cent in the previous quarter – the fourth straight quarterly decline, the National Institution for Finance and Development (NIFD) said in a report on Tuesday.

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But the decrease of 0.6 percentage points was slower than the 2.6 percentage point fall in the second quarter. That was because GDP output was also falling, which diluted the effects of deleveraging, according to NIFD, a research body under the Chinese Academy of Social Sciences.

“Debt growth fell more than we had expected but economic growth has fallen out of the potential growth range, much lower than estimates, leading to only a slight decline in leverage,” NIFD director Zhang Xiaojing and senior researcher Liu Lei wrote in the report.

“Taking the overall view, the degree of economic recovery is the key factor, but also the biggest hidden worry for macroeconomic leverage in the next few quarters.”

The findings underscore concern China’s economic slowdown is in full swing.

The researchers also highlighted other risks facing China’s economy, including shrinking corporate investment, property sector defaults and local government debt.

China’s economic growth fell to 4.9 per cent in the third quarter, after a 7.9 per gain in the second quarter and the 18.3 per cent expansion in the first.

The official manufacturing purchasing managers’ index, a survey measuring sentiment among factory owners in the world’s second-largest economy, fell to 49.2 last month, the National Bureau of Statistics said on Sunday, indicating the second consecutive month factory activity contracted.

Premier Li Keqiang told a meeting on Tuesday the Chinese economy was facing “new downward pressure” and small firms in particular needed help.

While the decline in China’s overall leverage ratio is moderating, debt growth among the residential, non-financial business and government sectors has slowed to “the lowest [level] since the beginning of this century”, NIFD said.

The combined figure fell to 9.7 per cent from a year ago in the July-September period, thanks to tighter monetary policy.

The leverage ratio in the non-financial business sector dropped for the fifth consecutive quarter to 157.2 per cent at the end of September, down 1.6 percentage points from the previous quarter.

But the slowdown in debt growth was because new investments slowed, as many firms choose to first repay their old debts before starting taking on new ones, the report said.

The household sector’s leverage ratio rose to 62.1 per cent in the third quarter, up 0.1 percentage points from the previous one. But residential consumption growth slowed to 15.8 per cent from 18.0 per cent over the same period.

The debt ratio among local governments rose marginally to 25.8 per cent in quarter three, from 25.2 per cent in the previous quarter.

“In an environment of sluggish investment demand and an unfavourable recovery in consumption, monetary policy conditions could be moderately relaxed to keep the economy above the potential growth level,” the NIFD researchers said.

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