Is China's debt too large? Report: From an aggregate perspective, China has not created too much debt

"If you create too much debt in aggregate, it will bring too much financial assets, too much investment and too much consumption, and it will bring inflation and currency depreciation, but this is not the case in China. ”

Recently, Zhang Bin, senior researcher of the China Finance 40 Forum (CF40) and deputy director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, said at the CF40 first quarter macro policy report press conference that from the perspective of aggregate, China has not created too much debt, and debt growth has not created excessive financial assets and purchasing power, which is reflected in China's low average inflation rate in the past 10 years, as well as the frequent lack of aggregate demand.

At present, the mainland's relatively high debt scale and rising leverage ratio have aroused widespread concern and concern in society. The CF40 special report written by Zhang Bin et al. pointed out that the debt leverage ratio is not suitable for evaluating debt risk, and it should be viewed differently from the perspective of aggregate and structure, and the way out to reduce the leverage ratio and debt burden lies in low interest rates and inflation.

Judging from the macroeconomic performance in the first quarter, there are bright spots and challenges. Guo Kai, executive director of the China Finance 40 Institute, said that direct debt reduction will affect GDP growth, and the final result may backfire, and in the short term, the mainland's economic growth still needs the process of debt creation.

See where the debt is growing

According to the CF40 report, by the end of 2023, the total debt scale of China's enterprises, government and residents reached 363 trillion yuan.

Over the past 20 years, the total debt stock of the mainland's non-financial sector (government, residents and non-financial enterprises) has increased from RMB 24.2 trillion in 2004 to RMB 363 trillion in 2023, a 15-fold increase in debt scale and an average annual debt growth of 15.3%. Among them, the proportion of domestic debt has been above 97%, and the proportion of domestic debt has continued to rise slightly since 2019, and the proportion of domestic debt will be 98.3% by 2023.

The report points out that in the past 20 years, the proportion of new debt from the government (including urban investment), non-urban investment enterprises and residents in the total new debt is about 4:4:2.

Among them, the proportion of new government debt in the broad sense of the total new debt is increasing, but this is not a special phenomenon in international comparison.

From a longitudinal point of view, there are significant changes in both the borrower and the debt function. The report points out that before the peak of industrialization in 2012, capital-intensive industrial enterprises borrowed and invested in debt, and from 2012 to the epidemic, the government, platforms, and the residential sector were the main new debts. The above two stages are basically consistent with the historical experience of developed countries.

However, after the epidemic, the new debt of non-urban investment enterprises has rebounded rapidly, especially the new debt of manufacturing and small and micro enterprises, which has not been seen in the history of developed countries.

Among them, the expansion of household debt peaked in 2018 and fell sharply after 2021. In stages: before 2015, the proportion was less than 20% for most of the time, and the debt expanded rapidly in 2015~2018, contributing more than 30%: after 2018, as the growth of housing loans slowed down, the proportion of new debt in the residential sector also began to decline, and the downward trend accelerated after 2021, as the growth rate of the balance of housing loans fell to 1.3% in 2022 and -1.6% in 2023, the proportion of new debt in the residential sector fell to 13.9% and 15.4% in the same period, the lowest level in 10 years.

In terms of macro leverage (total debt stock/nominal GDP), the National Finance and Development Laboratory report shows that the debt-to-GDP ratio reached 288% at the end of last year and further rose to 294.8% at the end of the first quarter of this year. Looking back over the past 20 years, this data has varied significantly around 2012, and the aforementioned special report argues that the main reason is the relative performance of nominal GDP.

The total amount of debt is not much

The report analyzes the relationship between debt growth and economic development from the perspectives of the three major functions of debt, namely, the conversion of savings to investment, the smoothing of intertemporal consumption and the improvement of personal living welfare, the creation of financial assets and the purchasing power of the whole society.

The report points out that China's debt scale has grown rapidly in the past two decades, and the debt leverage ratio has risen rapidly in the past decade. However, these facts do not serve as a basis for determining that China has created too much debt.

"I don't think we have too much money, whether it is from the point of view of inflation, RMB exchange rate change indicators, or from the perspective of international comparison, we don't have too much money, the main reason why we are facing a continuous lack of demand today may be related to the lack of money, of course, the price of money is also very important. Zhang Bin believes that in terms of total amount, we have not borrowed too much, and the risk is controllable.

According to the report, if too much debt is created in aggregate, it is also creating too much financial assets, too much purchasing power and too much demand. However, the financial assets created by China are not high relative to GDP (including per capita) from an international perspective, and looking back at the past decade, China has no inflationary pressure, and has frequently encountered insufficient demand pressure.

"The debt ratios of developed countries are generally higher than those of developing countries, but the risk premium of developed country debt is generally lower than that of developing country bonds, and the market believes that developed country bonds with high debt ratios are less risky. Zhang Bin said that debt leverage ratio is not a desirable indicator of debt risk, whether for individuals or as a whole.

Focusing on the (narrow) government sector, the report argues that government debt risk is judged by the government's borrowing space, which is not determined by the government's deficit ratio or government debt ratio, but by the balance of savings and investment power in the non-government sector. Zhang Bin said: "To put it simply, the government has room to borrow if inflation is low, and the government has no room to borrow if inflation is high. ”

According to the report, the gap between savings and capital formation in the non-financial corporate and household sectors has widened since 2012, rising from -3.1% of GDP in 2012 to 4.5% in 2021.

Recognize risks, control risks, what is the way out

"But the total amount (controllable risk) does not mask the structural problem. Zhang Bin said. While focusing on platform companies and real estate companies with prominent risks, the report also highlights the debt risks of manufacturing and small and micro enterprises. In contrast, household sector debt has so far remained within the margin of safety.

For the debt of local financing platforms, Zhang Bin believes that the current pressure is still in the process of amplification, although a series of positive measures are gradually seeing results, but in the environment of insufficient aggregate demand, the profitability of the government and platform companies is still a great challenge, and external financing is not smooth. "In an environment where asset prices are low, there are people selling in the market at this time, which is a superposition of pressure on the market. Zhang Bin said that real estate companies are in a similar situation.

"In recent years, new loans to the manufacturing industry have grown rapidly, and the related debt risks deserve attention and attention. The report pointed out that in addition to the high non-performing loan ratio shown by historical data, the overcapacity of the manufacturing industry will exacerbate the industry's cash flow constraints, and in the future, it will impact the industry's profit margin and cash flow through lower PPI and trade frictions, which will have a negative impact on the asset quality of related loans.

The report argues that desirable aggregate debt growth should be commensurate with the achievement of the 2% core inflation target, and that governments should account for a high share of aggregate debt growth and balance out private sector debt volatility.

In terms of monetary policy, Zhang Bin believes that the new expression of "keeping the scale of social financing and money supply in line with the expected targets of economic growth and price levels" is actually anchoring the growth rate of debt growth to achieve a reasonable price level and economic growth rate.

Guo Kai believes that the way out to reduce leverage and debt burden lies in low interest rates and inflation, that is, making the denominator bigger and the numerator smaller. The report points out that the past fiscal and monetary policies in controlling the scale of debt growth have not reduced the total debt leverage ratio of the whole society, but have depressed the income of debtors, lowered the price level, and thus increased the real debt burden.

The data shows that in 2018~2023, the average annual debt leverage ratio will increase by 9.7 percentage points, which is higher than the average annual debt leverage ratio increase of 7.9 percentage points during 2012~2018.

In terms of structure, the report suggests that, first, it is necessary to grasp the rhythm and take a multi-pronged approach to resolve the debt risk of platform companies; second, the strength of real estate enterprises themselves or local governments is not enough to resolve the risk of chain debt default of real estate enterprises, which needs to be solved from a more macro level; third, pay attention to the debt risks of manufacturing and small and micro enterprises as soon as possible.

(This article is from Yicai)