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China economy

China has US$17.41 trillion of financial resources to offset external risks, Beijing think tank says

  • Chinese Academy of Social Sciences research supports solutions to the risks identified by President Xi Jinping at last week’s Central Economic Work Conference
  • Date refers to China’s national balance sheet at the end of 2016, includes stakes in state-owned enterprises, national infrastructure projects and foreign reserves
PUBLISHED : Thursday, 27 December, 2018, 11:10am
UPDATED : Thursday, 27 December, 2018, 2:36pm

China has sufficient financial resources to offset the external risks identified by President Xi Jinping, but contingency plans are needed to counter potential economic “shock waves” next year, a top government think tank said.

The Chinese government had net assets of 120 trillion yuan (US$17.41 trillion) – including its stakes in state-owned enterprises (SOEs), national infrastructure projects and foreign reserves – on its books at the end of 2016, according to the analysis of China’s latest national balance sheet released by the Chinese Academy of Social Sciences on Wednesday.

“The government has accumulated lots of assets during the economic catch-up” over the past 40 years, “which allows us to handle risk with confidence,” said research project member Zhang Xiaojing.

As the national balance sheet calculations involve such a significant amount of data, it is always released two years later, although the central government does not release its version of the information.

The research report provides key statistical support to the solutions released at last week’s Central Economic Work Conference (CEWC), that said China should focus on strengthening the domestic economy in 2019 while also using its deep pockets to manage economic headwinds in the coming year.

Analysts now anticipate that the government will roll out more economic stimulus measures next year, such as a much larger fiscal deficit ratio than this year’s 2.6 per cent of gross domestic product (GDP) to allow for a bigger tax cut than the 1.2 trillion yuan reduction seen in 2018, as well as further government spending projects to stabilise the economy.

Han Wenxiu, who is the newly appointed deputy director of the office of the Central Financial and Economic Commission, which is the nation’s new financial regulation supervisory body, said the world’s second largest economy should aim for an “appropriate” macro leverage level.

The high ratio had previously been criticised as a sign of debt fuelled growth, but Han's questioning over an appropriate debt level suggests the government intends to introduce some policy easing to support economic growth.

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“Our non-financial corporate leverage is the highest internationally, but we must consider the fact that it already includes debt of local [government] financing vehicles and other implicit local debt,” added Han.

Han’s comments suggested the debt-to-GDP category is distorted structurally as local government financing vehicle debt could be considered as government debt.

According to the Switzerland-based Bank for International Settlements, the country’s overall debt-to-GDP ratio was 253.1 per cent at the end of June, down from 253.4 per cent a quarter earlier, having been 244 per cent a year earlier.

The non-financial corporate ratio for June fell to 155.1 per cent from 157.1 per cent a quarter earlier, but up from 151.8 per cent a year earlier.

The household ratio for June rose to 50.3 per cent, up from 49.3 per cent at the end of March and 46.9 per cent at the end of June 2017.

The government leverage rose to 47.6 per cent, up from 46.9 per cent at the end of March and 45.4 per cent at the end of June 2017.

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The high debt-to-GDP ratio is due partly to China’s high savings rate and the dominance of bank lending rather than financial market stock and bond offerings for corporate financing.

“It’s different from the US economy,” Han said.

China’s ability to manage risks will remain strong if there is no major exposure to foreign debt, Han said, citing the example of Japan who also have a high macro leverage and significant government debt but keeps its financial system away from crisis.

The high debt ratio was a major reason for Beijing’s policymakers to force a deleveraging campaign in the first half of this year.

The campaign has largely been shelved after the first round of US tariffs were announced on Chinese products in July, as policymakers turned back to stabilisation mentality.

Chinese Academy of Social Sciences project member Zhang said contingency plans are needed to counter potential shock waves, including further optimisation of fiscal resources.

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Despite the high book value of Chinese government assets, the government still has significant contingent liabilities, including implicit local debts of 30-50 trillion yuan and implicit pension liabilities of 25 trillion yuan, the think tank estimated.

In addition, many government assets are hard to liquidate to raise funds. About 44 per cent of Beijing’s net assets, or 52 trillion yuan, are stakes in state-owned enterprises, and more than half non-financial assets, or 23.9 trillion yuan, are government-controlled land reserves, the research showed.

“From a long-term perspective, we need to optimise the government’s holdings … promote SOE reform and force the closure of zombie enterprises,” Zhang added.

So-called “zombie enterprises” are those that incur recurring losses and continue to rely on the support of the government and state banks to bail them out.

Bai Chong’en, dean of the school of economic management at Tsinghua University, said that liquidation of certain government assets could help meet the funding gap next year.

“If we can inject more assets of SOEs into the pension [funding] pool, corporate contributions to social security could be reduced further,” he said.

The central government announced earlier this year that the tax authority would take over collection of social taxes at a local level next year to ensure they were collected in full.

Many companies, particularly small privately owned firms, fear that they will have to pay significantly more tax than they did in previous years, when they could often cut deals with local social security bureaus.