China debt ratio jumps in first half as Beijing abandons deleveraging to support trade war-hit economy

Frank Tang

China’s total debt ratio continued to grow in the second quarter of 2019 as the government continued to emphasise support for the economy over efforts to reduce excess debt and risky lending.

Even as China’s debt-to-gross domestic product (GDP) ratio surged in the first six months of the year to nearly 250 per cent, there are growing calls among academics and Beijing policy advisers for the country to further loosen its purse strings further to counter the headwinds from the trade war with the United States.

Downward pressure on the world’s second largest economy is mounting, as the 14-month old trade conflict escalated further on Friday with another tit-for-tat tariff exchange.

China’s end-June ratio of debt to GDP, a widely-used parameter to measure macro leverage and economic health, rose to 249.5 per cent from 248.8 at the end of March and 243.7 at the end of 2018, according to new figures released by the Beijing-based National Institution for Finance and Development (NIFD) on Tuesday.

The increase of the debt ratio by 5.8 percentage points in the first half – including 5.1 percentage points in the first quarter and 0.7 percentage points in the second – signals the “reversal” of Beijing’s “deleveraging” campaign that began in 2017, largely as a result of changing policy priorities.

Calculations by the Swiss-based Bank of International Settlements, which usually lag Chinese official figures by two or three quarters, indicated that leverage dropped by about one percentage point to 254 per cent of GDP at the end of last year. That was higher than the 249 per cent ratio in the United States.

“We need to tolerate a moderate rise in leverage, especially by the central government, for the sake of economic stabilisation,” read the NIFD research report, led by deputy director Zhang Xiaojing.

Li Yang, a former monetary policy adviser to the Chinese central bank and vice-president of the Chinese Academy of Social Sciences, said it was apparent the government was leaning toward support for economic growth in its work agenda.

“The Chinese leadership chose economic stabilisation and the support for the real economy, resulting in a greater tolerance for financial risk so far this year. This policy tone will continue,” he said at the NIFD symposium in Beijing.

A view of Beijing's central business district and the CCTV Headquarters under clean and blue sky in China's capital city. Photo: Simon Song

Beijing de-emphasised its deleveraging campaign – which included a crackdown on shadow banking, unlicensed internet-based financing, zombie state-owned enterprises and illegal borrowing by local governments – a year ago to focus on economic stabilisation.

The mountain of local government debt obligations and the rapid rise in household debt are major obstacles to Beijing’s efforts to use fiscal stimulus to boost the economy.

Ratings agency S&P warned last week that China’s push to end the reliance of local governments on off-budget debt has so far been “ineffective” because state-owned entities continued to hide their liabilities to support their businesses.

“This is a US$3 trillion problem, with local government hidden debt equal to about one-quarter of Chinese GDP,” S&P analyst Susan Chu wrote in a research note.

Some sectors need to increase their leverage. This is defensive and would prevent a large decline in growth momentum

Robin Xing, Morgan Stanley

The debt ratio rose in all sectors except the financial sector, whose ratio fell 1.9 percentage points to 58.7 per cent. Government leverage rose by 1.5 percentage points to 38.5 per cent in the first half of this year, Chinese household debt increased by 2.1 percentage points to 55.3 per cent, while that of non-financial corporations rose by 2.2 percentage points to 155.7 per cent.

The institution projected that the total debt-to-GDP ratio would rise by at least 7 or 8 percentage points over the course of 2019.

Beijing has allowed its budget deficit to increase and authorised more local bond issuance this year to support the economy through investment, particularly in infrastructure. Even so, fixed asset investment grew only 5.7 per cent in the first seven months of the year, only slightly higher than the decades-low 5.6 per cent growth over the first five months.

“Some sectors need to increase their leverage. This is defensive and would prevent a large decline in growth momentum that would have a [negative] influence on indicators like employment,” said Robin Xing, chief China economist at Morgan Stanley.

“It is probably necessary to add another trillion yuan (US$139.6 billion) to the quota for special [local government] bonds after the [current] annual quota runs out in September,” Xing added.

Beijing set a 3.08 trillion yuan (US$430.1 billion) quota for both general and special local government bonds for this year. The proceeds from special bonds can only be used to finance local infrastructure investment.

In the latest report to the National People’s Congress, finance minister Liu Kun vowed to cut general expenditure by 10 per cent to finance the value-added tax cut that took effect on April 1 and ensure funding of key projects for the rest of the year.

More from South China Morning Post:

This article China debt ratio jumps in first half as Beijing abandons deleveraging to support trade war-hit economy first appeared on South China Morning Post

For the latest news from the South China Morning Post download our mobile app. Copyright 2019.