After the rapid rise in 2020, China’s macro leverage ratio decreased significantly in 2021.
Recently, the national finance and development laboratory (nifd) released the report on China’s leverage ratio in 2021 (hereinafter referred to as the report). According to the report, in 2021, China’s macro leverage ratio decreased to 263.8% from 270.1% at the end of 2020, and decreased by 6.3 percentage points throughout the year, realizing considerable deleveraging. However, this level is still 17.3 percentage points higher than that in 2019 before the epidemic.
Liu Lei, Secretary General of the national balance sheet research center of the national finance and development laboratory, told reporters that at present, China’s economy is facing triple pressures of shrinking demand, supply shock and weakening expectations. For some time to come, China’s macro leverage ratio may enter an upward cycle, and the key factor affecting the trend of leverage ratio lies in the degree of macroeconomic recovery.
The report predicts that the macro leverage ratio will rise from the current 263.1% to about 268% in 2022, an increase of 5 percentage points for the whole year.
It is also said that from the perspective of stable growth, the policy probability will appropriately improve the tolerance for the upward leverage ratio. The decline of macro leverage ratio will leave room for the increase of leverage in the first quarter of 2022, and the short-term wide credit is sustainable.
macro leverage ratio continues to decline
China’s macro leverage rate rose by 6.6 percentage points since 2020. In the past year, with the effective prevention and control of the epidemic, the steady recovery of the economy and the effective implementation of macro policies, the macro leverage ratio has remained basically stable.
According to the report, in the whole year of 2021, China’s macro leverage ratio decreased by 6.3 percentage points, from 270.1% at the end of 2020 to 263.8%, and the decline rates in the four quarters were 2.1, 2.6, 0.6 and 1.0 percentage points respectively.
According to Liu Lei’s analysis, the reason for the significant decline of macro leverage ratio in 2021 is that the nominal economic growth rate is large and the debt growth rate hit the bottom. Data show that in the four quarters of last year, nominal GDP increased by 20.8%, 13.4%, 9.7% and 9.7% respectively, and the overall nominal GDP increased by 12.8% in the whole year, exceeding expectations.
“The more than expected growth mainly occurred in the first half of the year. The month on month growth rate in the first two quarters exceeded the level of the past few years. In particular, the month on month growth rate in the second quarter was higher, and the rapid recovery of the economy realized a perfect deleveraging process.” Liu Lei said.
Meanwhile, the monetary and credit environment in 2021 is neutral and tight. The stock of broad money and social finance increased by 9.5% and 11.8% respectively, and the total debt of the three sectors increased by 10.0%, close to the lowest debt growth rate since 1991 (the lowest in 2018, 9.6%).
The fourth quarter 2021 monetary policy implementation report released by the central bank also mentioned that under the impact of the epidemic in 2020, China’s economic growth once slowed down significantly and the macro leverage ratio increased periodically. But then, China took the lead in controlling the epidemic, resuming work and production, and achieving positive economic growth. The resilience of economic development has been continuously strengthened, which plays a prominent role in stabilizing leverage. On the other hand, the macro policy was strong, moderate and effective, stabilizing the basic economic market with controllable debt increment.
However, Liu Lei also mentioned that although the leverage ratio decreased by 6.3 percentage points in 2021, the total leverage ratio still increased by 17.3 percentage points in 2020 and 2021, and it will take a long time to absorb the impact in the future.
But on the whole, compared with major economies, the growth of China’s macro leverage ratio has been relatively controllable since the epidemic. According to the latest data of the bank for International Settlements (BIS), the leverage ratios of the United States (286.2%), Japan (416.5%) and the euro zone (284.3%) at the end of the second quarter of 2021 were 31.3, 37.1 and 27.2 percentage points higher than those at the end of 2019 respectively. According to the statistics of the central bank, China’s leverage ratio in the same period was 275.9%, 19.9 percentage points higher than that at the end of 2019, and the growth rate was 11.4, 17.2 and 7.3 percentage points lower than that of the United States, Japan and the eurozone respectively.
“It can be seen that since the epidemic, China has supported the rapid recovery of economic growth with relatively few new debts, and the increase of macro leverage ratio is relatively not high.” The central bank mentioned in the monetary policy implementation report.
the leverage ratio of non-financial enterprises decreased the most
In terms of structure, the leverage ratio of the resident sector was the same as that at the end of 2020, maintained at 62.2%, and the growth rates in the four quarters were – 0.1, – 0.1, 0.1 and 0.1 percentage points respectively.
The leverage ratio of non-financial enterprise sector decreased by 7.5 percentage points, from 162.3% at the end of 2020 to 154.8%, and decreased by 0.9, 2.6, 1.5 and 2.4 percentage points respectively in the four quarters.
The leverage ratio of government departments increased by 1.2 percentage points, from 45.6% at the end of 2020 to 46.8%, and the growth rates in the four quarters were – 1.1, 0.1, 0.9 and 1.3 percentage points respectively.
It can be seen that in 2021, the non-financial enterprise sector made the greatest contribution to the process of deleveraging, with a total decrease of 7.5 percentage points in the whole year. In 2020, the leverage ratio of the enterprise sector rose by 10.4 percentage points, which means that the increase of more than 70% of the enterprise sector has been adjusted.
In addition, in the past two years, the leverage ratio of enterprises has increased by only 2.9 percentage points, which is significantly lower than that of residents and government departments. In fact, since the third quarter of 2020, the leverage ratio of the enterprise sector has continued for six quarters, showing a trend of deleveraging.
According to Liu Lei’s analysis, there are three main reasons for the sharp decline in the leverage ratio of non-financial enterprises in 2021. First, enterprises are not willing to invest and have lower demand for relying on loans to expand the scale of production and operation, which is the main reason for the decline in the leverage ratio of enterprise departments; Secondly, the profits of enterprises grow rapidly, but they are pessimistic about the future; Finally, the supply of bank credit is tightened, but it is expected that the total easing of monetary policy will be strengthened in 2022, and the support for non-financial enterprises will be further strengthened.
A macro analyst also told the first financial reporter that the decline in the leverage ratio of non-financial enterprises is mainly related to the weakening financing demand of the real economy under the background of the slowdown in economic repair. At the same time, the superposition of regulatory policies for real estate and urban investment enterprises limits their debt expansion.
However, the report mentioned that with the government’s increased policy efforts to support market players and the expected stabilization, the growth rate of enterprise investment is expected to increase, and the leverage ratio of the enterprise sector may rise steadily in 2022.
In contrast, the resident leverage ratio remained stable at 62.2% in 2021, but increased by 6.1 percentage points in the span of two years. On average, it still maintained an annual growth rate of about 3 percentage points. It is the main driving force for the rise of China’s macro leverage ratio and the fastest rising speed among all departments.
According to the report, the leverage ratio of China’s resident sector has exceeded the level of Germany and is close to that of Japan.
In terms of leverage ratio of government departments, the increase is basically in line with expectations. It increased by 1.2 percentage points in 2021 and 8.3 percentage points in the past two years. From a two-year span, government departments are the main driving force for the rise of macro leverage ratio.
The leverage ratio of the financial sector continued to decline. In 2021, the financial leverage ratio calculated by the asset side decreased by 5.3 percentage points, from 54.2% at the end of 2020 to 48.9%; The financial leverage ratio calculated by the debtor remained unchanged at 62.7%.
the future may enter the uplink cycle
On the whole, although the macro leverage ratio has decreased in the past year, some people in the industry believe that the leverage ratio may rise steadily in the future.
The report predicts that the nominal economic growth rate and debt growth rate will be high in 2022, the nominal economic growth rate will fall from 12.8% to about 10%, the debt growth rate will rise from 10% to about 12%, and the macro leverage ratio will rise from the current 263.1% to about 268%, an increase of 5 percentage points throughout the year.
“This is mainly due to the fact that the downward pressure on the economy is still large in the future.” According to Liu Lei’s analysis, first, the epidemic situation is still the biggest uncertain factor affecting economic recovery; Second, the accelerated evolution of the global pattern, the intensification of competition between China and the United States, and the consideration of industrial chain and supply chain security have highlighted external constraints; Third, China is facing structural transformation, population aging, common prosperity and double carbon goals, as well as “triple pressure”.
In this context, “China’s macro leverage ratio may enter an upward cycle, and the key factor affecting the trend of leverage ratio is undoubtedly economic growth.” Liu Lei said.
The central bank also mentioned in the monetary policy implementation report that China’s macro leverage ratio has decreased steadily, creating space for the future financial system to continue to increase its support for the real economy; At the same time, China’s epidemic prevention and control situation is good, and the resilience of economic growth is increasing, which also creates conditions for maintaining the basic stability of macro leverage in the future.
The central bank also said that in the next stage, prudent monetary policy should be flexible and appropriate, strengthen cross cycle regulation, enhance the stability of total credit growth, and maintain the basic matching of money supply and social financing scale growth with economic growth. This “matching” mechanism itself has the meaning of maintaining the basic stability of macro leverage ratio. It is expected that China’s macro leverage ratio will remain basically stable in 2022 with the further recovery of economic development and the continuous enhancement of endogenous growth momentum.
In this regard, Zheshang Securities Co.Ltd(601878) macro research team believes that from the perspective of steady growth, the policy probability will appropriately improve the tolerance for the upward leverage ratio. The decline of macro leverage ratio leaves room for the increase of leverage in the first quarter of 2022, and the short-term credit relief is sustainable.
