China debt ratio up again in Q2, shadow banking still strong

August 24, 2020

HONG KONG -- China's ongoing effort to stimulate its economy led to much faster accumulation of debt in Q2 2020, with the debt ratio moving up by another 8% to 268.4% as a proportion of GDP, according to the global financial group, Natixis, in a report issued today. The report says the largest rise in debt stems from the corporate sector, with its debt increasing from 162.6% to 166.2%. "In particular, corporate loans and bond issuance grew by another 2.1% and 1.4% respectively."

 However, leverage from shadow banking continued to come down, Natixis says, with a negative year-on-year growth rate and shadow banking's share of GDP slightly decreasing.

"This shows that, while Chinese policymakers' fight to control shadow banking activities continues, corporates have again been supported with massive lending."

Natixis says Chinese Government debt saw rapid accumulation, with the broadly-defined Government debt-to-GDP ratio standing above 70% for two consecutive quarters.

"Similar to the corporate sector, the increase mainly occurred in the Government's on-balance sheet, especially through local government bond issuance, but less so in its off-balance sheet," the report says.

"The increase in China's official on-balance public debt is clearer if one compares now (more than 40%) with the rather stable ratio of 37% to 38% over the last five years.

"In turn, off-balance sheet public debt, from local government financing vehicles (LGFV), witnessed only a slight rise, as indicated by bond issuance data.

In fact, the total outstanding value for China's LGFV bond grew at a much slower pace year-on-year during the second quarter.

"Both of the above patterns in the corporate and Government sectors seems to suggest that the Chinese Government has become more willing to tolerate a larger debt burden as long as it happens on the Government's balance sheet.

"Harder control, or even monitoring, of the off-balance sheet risk might be the reason behind this move."

Natixis says that, in addition to expansion in corporate and Government debt, household leverage continued to expand steadily. In particular, household mortgage debt rose by 0.9% in the second quarter, in line with a rebound in housing investment.

"The persistence of the rising debt-to-GDP ratio notwithstanding, the recent economic recovery implies that the growth pick-up has not been strong enough to offset debt expansion," the report says.

"Even if we assume that the first two quarters of 2020 experienced the same growth rates as they did in the first two quarters of 2019, the overall debt-to-GDP ratio would have still risen by 5.9%.

Natixis says one of China's key policy dilemmas-- namely the short-term trade-off between stimulating economic and financial stability -- could be perceived as less concerning if debt accumulation was better monitored through on-balance-sheet positions.  (ATI).