In the first three quarters, China's macro leverage ratio fell by 5.3%

Source: Economic Reference Newspaper

Original title: China's macro leverage ratio fell by 5.3% in the first three quarters

Macro leverage fell by 0.6 percentage points in the third quarter of 2021, from 265.4% at the end of the second quarter to 264.8%, and a total decrease of 5.3 percentage points in the first three quarters. M2/GDP fell by 2.7 percentage points in the third quarter, from 212.0% at the end of the second quarter to 209.3%. From the perspective of deleveraging, the macro leverage ratio has continued to decline for four quarters from the highest point of 271.2% at the end of the third quarter of 2020, with a total decline of 6.4 percentage points in the four quarters; the decline rate of the leverage ratio has weakened in the third quarter of 2021, and the rapid deleveraging period driven by denominator factors (that is, nominal GDP growth) has passed, and the future macro leverage ratio will be dominated by stability.

The two major factors affecting changes in macro leverage are debt growth and economic growth. In recent quarters, monetary policy has returned to normalcy, and the policy environment is tight, which is the main reason for the steady decline in the macro leverage ratio. Overall, the degree of economic recovery is a key factor affecting macro leverage in the coming quarters.

The continuous decline in the proportion of housing loans has become the main reason for the increase in the leverage ratio of residents

The leverage ratio of the residential sector rose by 0.1 percentage points in the third quarter of 2021, from 62.0% at the end of the second quarter to 62.1%, and decreased by 0.1 percentage points in the first three quarters. Since the third quarter of 2020, the leverage ratio of residents has remained basically stable. Affected by the epidemic, the leverage ratio of residents in the first quarter to the third quarter of 2020 accelerated, and then began to stabilize. Looking at the growth level of the two years, from the third quarter of 2019 to the third quarter of 2021, the leverage ratio of residents increased by 6.8 percentage points; and from the third quarter of 2017 to the third quarter of 2019, the leverage ratio of residents also increased by 6.9 percentage points. On the whole, the basic trend of rising leverage ratio of residents has not changed significantly, but has only changed part of the rhythm due to the epidemic.

First of all, the proportion of residents' operating loans is rising. In the first three quarters of 2021, the ratio of medium- and long-term loans and housing loans to GDP continued to decline, with short-term consumer loans for residents falling slightly, and residents' operating loans maintaining an upward trend. The growth of resident operating loans is the only factor that has a positive contribution to the leverage ratio of residents, while other loans have pulled down the leverage ratio of residents. To a certain extent, the changes in the structure of residents' debt reflect the effectiveness of the real economy of financial services, which is beneficial to alleviating the risk of residents' debt.

On the one hand, the proportion of real estate loans continues to decline. Regulatory policies have been effective in curbing the housing bubble, and the rapid growth of real estate loans has been controlled. On the other hand, the monetary authorities have strengthened their support for inclusive small and micro loans. Inclusive lending has been on an accelerating trajectory since 2018. Personal operating loans are an important part of inclusive small and micro loans, and the growth rate of such loans has continued to increase in recent years. To a certain extent, the changes in the structure of residents' debt reflect the effectiveness of the real economy of financial services.

Second, the recovery of residents' consumption expenditure has weakened. Since the first quarter of this year, the growth rate of residents' consumption has exceeded the growth rate of residents' disposable income, and the residents' savings rate has begun to decline. However, the recovery of consumption in the third quarter weakened. Under the strategy of domestic large circulation, the final consumption of residents is an important force that determines the degree of economic recovery; only when consumption recovers, enterprises can have optimistic expectations and further increase investment to stimulate economic growth. The recurrence of the epidemic objectively inhibited the recovery of consumption. In the coming period, there will be a large room for recovery of residents' consumption. Macro policies still need to exert efforts in promoting consumption, release the consumption potential of residents by adjusting income distribution, drive economic growth, and achieve a healthy and stable macro leverage ratio.

The non-financial corporate sector continues to deleverage corporate revenues and profits

In the third quarter of 2021, the leverage ratio of non-financial enterprises fell by 1.6 percentage points, from 158.8% at the end of the second quarter to 157.2%; in the first three quarters, a total of 5.1 percentage points decreased, which has been declining for five consecutive quarters. Before the impact of the epidemic, the leverage ratio of non-financial enterprises at the end of 2019 was 151.9%, and the current leverage ratio still has room to go down.

The cumulative growth rate of fixed asset investment in the first three quarters of this year was 7.3%, of which the most prominent performance was manufacturing investment, an increase of 14.8% year-on-year, and the cumulative growth rate of real estate and infrastructure investment was 8.8% and 1.5% respectively. Looking at the compound average growth rate of the past two years, the total investment growth rate in the first three quarters was 4.0%, of which real estate was 7.2%, and manufacturing and infrastructure investment was 3.6% and 2.0%.

From the perspective of business operation, the revenue and profit of enterprises have performed well this year. From January to August, the cumulative revenue and profit of industrial enterprises increased by 23.9% and 49.5% year-on-year, respectively, while the income and profit of state-owned enterprises increased by 24.9% and 75.0% respectively. At the same time as profits have risen, companies have further reduced the need for external debt financing. The corporate sector has accumulated a large number of assets on the books and there is no urgent financing need in the short term. One of the main reasons for the stabilization of macro leverage in the past few years is that non-financial companies have limited willingness to invest, and they will not invest further to expand the scale in an environment where profit margins are acceptable, thereby reducing the growth rate of corporate debt. At the same time, since the beginning of this year, the real estate regulation and control policy has become tighter, the financial pressure of many real estate enterprises has risen, and the growth rate of real estate investment has declined, which in turn has led to a decline in the income of local government land transfer fees.

Government leverage rose slightly throughout the year or increased less than expected

The leverage ratio of government departments rose from 44.6% at the end of the second quarter to 45.5% at the end of the third quarter, an increase of 0.9 percentage points, and a total decrease of 0.1 percentage points in the first three quarters. Among them, the leverage ratio of the central government rose from 19.4% at the end of the second quarter to 19.7%, an increase of 0.3 percentage points; the leverage ratio of local governments rose from 25.2% at the end of the second quarter to 25.8%, an increase of 0.6 percentage points. The issuance progress of treasury bonds and local bonds is relatively slow, among which the actual new balance of local government general bonds is close to the annual new debt limit, while treasury bonds and local government special bonds still have greater room for growth. The leverage ratio of government departments is expected to increase in the fourth quarter. Considering the limited means of government debt expenditure and the low willingness of the government to raise funds, the annual debt increase may be lower than the annual budget deficit.

First, the annual increase in the national debt is likely to be lower than the budget deficit. The scale of new treasury bonds in the first three quarters was 1.12 trillion yuan, while the annual budget deficit was 2.75 trillion yuan, and there was still a gap of 1.63 trillion yuan, higher than the total new scale in the first three quarters. In the past decade or so, the actual balance of new treasury bonds in the first three quarters has exceeded more than half of the annual new limit. The actual increase in the first three quarters of 2021 is only about 40% of the annual new limit. Combining these two factors, it is expected that the actual new balance this year may be less than the new limit, and the increase in the leverage ratio of the central government may be lower than expected.

The gap between the central government's revenue and expenditure is small, and the demand for treasury bond financing has declined. In the first eight months of this year, the central government's fiscal revenue increased by 18.9% year-on-year, while the central government's fiscal expenditure at the same level fell by 3.6% year-on-year. From the perspective of the annual budget, the budget scale of the central government's finance and expenditure increased by 8.1% and -0.1% respectively compared with the previous year. In the first eight months, the central government's fiscal surplus was large and exceeded expectations at the beginning of the year. Central fiscal revenue grew faster than expected, reducing the central government's demand for debt financing.

Treasury cash is quite abundant. According to the regulations on the management of the balance of treasury bonds, the Ministry of Finance will appropriately adjust the scale of treasury bond issuance in accordance with the treasury funds and market changes, so as to help reduce the cost of treasury bond financing and promote the smooth operation of the treasury bond market. From the central bank's balance sheet, the current level of government deposits is at a historic high. The central government holds a large number of deposits, and in the future, the scale of government deposits can be reduced first, and then debt financing can be considered, which also reduces the demand for government bond issuance.

Second, the issuance of local government special bonds is slower. In the first three quarters, the scale of new local government general debt was close to the new debt limit for the whole year. However, special debt increased by less than 2.2 trillion yuan, which is 61% of the annual new debt limit; of which about 1.2 trillion yuan was added in the third quarter, exceeding the sum of the new scale in the first two quarters in the first half of the year. To achieve the goal of all new quotas for the whole year, more than 1.4 trillion yuan will be added in the fourth quarter. The slower issuance of local government special bonds is closely related to the fact that fewer and fewer projects meet the approval conditions, and the approval standards are becoming more stringent. The Ministry of Finance recently said that the new special bond quota in 2021 should be issued by the end of November. It is expected that the leverage ratio of local governments will also increase by a certain extent.

The central bank has put the overall gate of good money and the leverage ratio of the financial sector continues to decline

In the third quarter of 2021, the financial leverage ratio of the asset side's statistical caliber dropped from 51.3% at the end of the second quarter to 49.2%, a decrease of 2.1 percentage points. The financial leverage ratio under the statistical caliber of the debtor side rose from 61.7% at the end of the first quarter to 61.9%, an increase of 0.2 percentage points.

From July to October, the amount of MLF was 100 billion, 600 billion, 600 billion and 500 billion yuan, respectively. Among them, the amount of release in September and October is consistent with the amount of maturity, and july and August are less than the amount of maturity of 300 billion yuan and 100 billion yuan respectively. On the whole, the central bank's investment in liquidity has remained basically stable, and the excess reserve ratio of commercial banks at the end of the second quarter was only 1.52%, and the excess reserve ratio of financial institutions was only 1.2%, both at a historical low. The central bank's idea of "putting the general gate of money in a good way" and not engaging in "flood irrigation" is relatively firm.

A number of recommendations for monetary and fiscal policy

First, moderately adjust the monetary aggregate policy to ensure stable macroeconomic growth. In the first three quarters of this year, the main macro indicators remained in a reasonable range, and the economic recovery trend continued, but it also faced many hidden worries. In an environment where investment demand is slowing and consumer demand is not recovering as expected, monetary policy conditions can be adjusted appropriately to support the economy to stay above potential output.

The macro-control policy under the tight balance ensured that the CPI remained at a low level and did not follow the PPI to rise sharply, but it also had some adverse effects on the economic recovery. Real estate investment and infrastructure investment continue to decline, which not only reduces the financing needs of enterprises and reduces the leverage ratio of the corporate sector, but also the hidden concerns of balance sheet recession. At present, monetary policy is facing a difficult test, and the judgment of the future CPI trend is crucial. It is recommended to moderately relax the total monetary policy, continue to reduce the financing interest rate, reduce the financial costs of enterprises, boost corporate confidence as much as possible, drive investment back to normal growth, and increase the financing needs of enterprises.

Second, increase fiscal expenditure to stimulate infrastructure construction, and public expenditure to drive private investment. Infrastructure investment is one of the troika of total investment, accounting for about 25% of all fixed asset investment, and it is also an important starting point for government departments to drive the economy. Before 2017, the growth rate of infrastructure investment was basically maintained at about 20% per year. In recent years, with structural deleveraging restricting local government hidden debt and the central government's restrictions on local government special debt, the growth rate of infrastructure investment has gradually slowed down.

For some necessary infrastructure investments, the social benefits and contributions they can play to future long-term economic growth should be comprehensively examined. These investments cannot be completely replaced by private capital investment, and better social public infrastructure can mobilize the enthusiasm of private investment and drive investment growth. Therefore, it is recommended to appropriately increase the proportion of national debt, increase the proportion of general debt of local governments, use public expenditure to drive the input of private capital, continue to strengthen infrastructure construction, and maintain long-term stable economic growth.

Third, under the premise of insisting on housing and not speculation, we must guard against the risks of the real estate industry. In the long run, the regulation and control of the real estate market should maintain concentration, which is also the basic requirement for realizing the domestic cycle. However, in the short term, short-term liquidity risks should be avoided. Adhere to the "city policy", not only to ensure that "housing is not speculated", but also to achieve "free collection". First-tier cities still need to be tightened, but other key urban agglomerations/metropolitan areas can be moderately liberalized from the perspective of land supply and housing supply.

(Author: Zhang Xiaojing, Director of the Institute of Finance, Chinese Academy of Social Sciences, Director of the National Finance and Development Laboratory; Liu Lei, Secretary-General of the National Balance Sheet Research Center of the National Finance and Development Laboratory)

Editor-in-Charge: Wang Su