China must not choke off the private sector’s access to credit in the name of deleveraging
- With state-owned enterprises soaking up the bulk of bank loans, the economy is in fact underleveraged. Many private businesses depend on freely flowing credit to survive and thrive
- If the government truly wants to build a competitive financial system, it must allow banks to run like banks
For some time, Chinese policymakers have been fearful of rising domestic indebtedness. Their concern is that an overleveraged economy will breed financial instability and lead to economic calamity. As such, Beijing’s monetary and credit policy has been preoccupied by deleveraging, causing the economy to slump from time to time.
It is not an exaggeration to say that China’s deleveraging campaign has often become a key source of weakening global demand and commodity price declines since 2014.
Is China overleveraged? Although widely believed so in the business and economic community, the evidence is not at all clear, and actually suggests otherwise. For example, China is often quoted as having one of the highest private-sector debt to GDP ratios in the world, with total social financing standing at 210 per cent of gross domestic product. This compares with a non-financial private-sector debt to GDP ratio of 150 per cent in the US.
Nevertheless, total social financing is a much broader measure of financing activity that includes not only bank loans and corporate debt issuance but also shadow banking activities and local and central government borrowing. This means comparing China’s debt with that of other nations is often like comparing apples to oranges.
If measurements of debt are adjusted to account for different components and inconsistencies, a different picture emerges.
