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Deleveraging: Data, Risks and Countermeasures
Zhang Xiaojing and Chang Xin
1National Institution for Finance & Development, Chinese Academy of Social Sciences (NIFD, CASS)
2National Center for Balance Sheet Research
Abstract:
Based on the latest macro financial data, this paper estimates China’s overall leverage ratio and sector-specific leverage ratios for households, non-financial enterprises,
government and financial institutions. It is noted with particular emphasis that the tendency of non-financial enterprises to increase leverage has further intensified instead of abated, which warrants our great attention. Considering that increasing leverage of government sector represents a basic international trend since the eruption of global financial crisis, we simulate the paths of dynamic evolution of China’s debt-to-GDP ratio on the basis of different scenarios of the difference between real economic growth rate and real interest rate, together with the NPL ratio of banks. Result indicates that in the coming two decades, the leverage ratio of China’s government sector will continue to rise and will not converge. Hiking leverage ratio, growing debt burden and rising non-performing assets present major financial risks facing China for a certain period of time in the future. Under the premise of supply-side structural reforms and in tandem with the efforts of the real economy to reduce overcapacity, inventory and eliminate zombie firms, we suggest that China focus on disposing of non-performing assets and steadily deleverage through the implementation of integrated strategies to prevent debt problems from triggering systemic financial crisis
Keywords: leverage ratio, risk, supply-side structural reforms
JEL classification: G38, E50
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