New loans for old: growing state debt piles ‘block Xi’s road to reduced risks’
Local governments are finding new ways to mask borrowings despite Beijing’s drive to cut leverage, a national research institution finds
Rising local government and state firm borrowings are stalling Beijing’s efforts to contain debt risks in the Chinese economy, according to a government-backed research institution.
The national leadership, headed by President Xi Jinping, listed “deleveraging” as a top economic priority in late 2015, but local authorities and state-owned enterprises continued to rely on debt for economic expansion, amplifying financial risks for the rest of the economy, it said.
In a report released on Friday, the Beijing-based National Institution for Finance and Development (NIFD), said the “leverage ratio” of the non-financial sector rose to 237.5 per cent at the end of March from 234.2 per at the end of last year.
The leverage ratio compares total debt to assets or gross domestic product.
The leverage ratio of Chinese companies and local governments rose 2.7 percentage points in the first quarter, surpassing the full-year increase of 2.1 percentage points last year. The rise was due to thriving shadow banking, the institute said.
Debts held by state firms accounted for 60 per cent of all corporate debt, and the debt-to-asset ratio had remained largely unchanged at 66 per cent since late 2015 when Beijing first required state firms to cut their borrowing load, the report said.
Analysts say the administration’s ability to defuse the country’s debt bomb will be vital for the future of the economy. And there is little time to waste – the Institute of International Finance said last month that China’s debt might have surpassed 300 per cent of GDP by May, up from about 150 per cent in 2008.
Li Yang, NIFD head and a senior researcher at the Chinese Academy of Social Sciences, said on Friday that China was “far from a debt crisis”, but the leadership was growing more intolerant of the problem.
A sign of that intolerance came last weekend at the National Financial Work Conference, a key decisionmaking meeting chaired by Xi. It made “deleveraging in state-owned enterprises (SOEs)” a major policy priority to ensure financial stability and security.
State firms have long enjoyed easy access to credit and an implicit government guarantee. According to the NIFD, one-third of new state-firm debt in 2015 was used to repay old loans. At the same time, those firms’ contribution to growth and job creation continued to decline.
Zhang Xiaojing, the lead writer of the NIFD report, said the “key to addressing the high leverage ratio of SOEs is to phase out outdated production capacity” so that credit, land and human capital could be deployed elsewhere.
The report also said local governments were masking their debts in new ways, including as “government investment guidance funds” and “special construction funds”.
The NIFD’s findings dovetail with those of other agencies.
Standard & Poor’s said last week that Xi’s administration was facing “significant obstacles” in reining in credit growth and reducing financial risks. The government’s goal of maintaining relatively fast growth, as well as the country’s large state-owned sector, would continue to lead to credit expansion, the agency said. Moody’s downgraded China’s sovereign rating in May, citing concerns about debt problems.