The mainland’s leverage ratio continues to rise in 2020, with financial risks at a high level and the proportion of debt of the Communist Party’s state-owned enterprises rising to 67%. The industry believes that the real leverage ratio on the mainland is higher than the official data, and that the CCP’s reliance on excessive indebtedness in exchange for economic illusions will cause risks to rise.
The Chinese Communist Party‘s Academy of Social Sciences and other departments recently jointly released the book China’s National Balance Sheet 2020, which includes data on China’s national balance sheet for a total of 20 years from 2000 to 2019.
The book says that due to the (CCP virus) Epidemic, China’s macro leverage ratio was 270.1% (debt is 2.7 times GDP) as of the third quarter of 2020, close to the global leverage ratio of 273.1% and 61.7 percentage points higher than the emerging economies’ leverage ratio of 208.4%.
In addition, financial institutions and the government sector have the top two risk shares in the 2018 risk distribution, accounting for 54.5% and 17.7%, respectively. The vast majority of Chinese financial enterprises are CCP SOEs, and if 80% of financial institutions are guaranteed by the government, the final financial asset risk borne by the government sector is 61.3%.
Among corporate debt, the share of CCP SOE debt in corporate sector debt rose from 57% at the beginning of 2015 to 67% at the end of 2018.
Outsiders have been questioning the CCP’s economic data, and the real leverage ratio on the mainland may be higher than the official data.
Judging from mainland media reports alone, there are contradictions in the before and after data. As early as 2017, former CCP Finance Minister Lou Jiwei said that “China’s overall leverage ratio is currently 250 percent,” while in November last year, Zhang Xiaojing, director of the Institute of Finance at the Chinese Academy of Social Sciences, said that China’s leverage ratio rose 27.7 percentage points to 270.1 percent in the first three quarters of 2020.
Lou also said at the Time that overleveraging was the biggest threat to China’s economy; he had earlier said he wanted to dispel the illusion of economic stability “bought” by leveraging.
According to a mainland media report on Feb. 24, as of the end of 2020, the No. 1 species in the mainland bond market is local government debt, with a total size of 25.5 trillion (RMB, same below), and 4.4 trillion new local government debt in 2020.
Commercial banks are the main investors of local government debt, holding 85% of local government debt. Among them, national commercial banks account for 84% and urban commercial banks account for 10%.
In addition, the number and scale of debt defaults by CCP SOEs rose rapidly in 2020, by 3.6 and 3.5 times respectively. close to half of the mainland corporate bond defaults in 2020 came from CCP SOEs, such as Beifang Founder Group, Tsinghua Ziguang Group, Brilliance Auto Group, Henan Yongcheng Coal and Electricity Holding Group, etc.
Bloomberg reported in November last year that some CCP SOEs, although not yet in default, have seen their risk rise and their bond secondary market prices fall sharply, such as Pingdingshan Tianan Coal Company Limited, Jizhong Energy Group, Tianjin TEDA Investment Holdings, and Yunnan Kang Travel Holdings Group.