The recently released Annual China Leverage Report 2022 by the National Finance and Development Laboratory shows that the country's macro leverage ratio rose by 10.4 percentage points to 273.2% in 2022 as a whole, from 262.8% at the end of 2021, with increases of 4.5, 4.6, 1.0 and 0.3 percentage points in the four quarters, respectively. The residential sector leverage ratio remained unchanged at 61.9% at the end of 2021. The non-financial corporate sector leverage ratio increased by 6.8 percentage points to 160.9% from 154.1% at end-2021, with increases of 4.1, 2.1, 0.7, and -0.1 percentage points in the four quarters, respectively. The government sector leverage ratio increased by 3.6 percentage points to 50.4% from 46.8% at the end of 2021. Meanwhile, M2/GDP rose by 12.9 percentage points to 220.2% from 207.3% at the end of 2021, and the stock of social finance/GDP rose by 11.1 percentage points to 284.4% from 273.3% at the end of 2021.
Figure: Leverage Ratio of the Real Economic Sector and Its Distribution
Source: National Finance and Development Laboratory.
Structurally, the leverage ratio of the corporate sector in China declined significantly by quarters, even became negative by the fourth quarter of last year. This indicates that the policy stimulus launched one after another in the second half of the year did not have a significant effect on driving businesses in a general market environment that was increasingly hit by the COVID-19 pandemic. In addition, the report argues that the negative impact of financial deleveraging on the credit scale declined and was partly responsible for the rise in leverage in the corporate sector. This is a good sign for financial risks and corporate financing difficulties. However, in terms of the overall picture, there is less willingness for enterprises to invest, with a large number of enterprises having difficulties in business operation, coupled with unstable expectations for the future, and these are the main factors behind the slowdown in the growth rate of leverage in the corporate sector.
What is more noteworthy is that the macro leverage ratio of the residential sector is almost unchanged. The report mentions that there are obvious signs of active deleveraging in the residential sector, and the balance sheet of this sector is actively contracting. The report also notes that in 2022, deposits in the residential sector rose by RMB 17.9 trillion, while loans to residents rose by only RMB 3.8 trillion, with the scale of the growth of deposits far exceeding that of loans, and deposits increased by RMB 14.1 trillion more than loans, resulting in a large gap between the two. In addition, new housing loans in the residential sector fell sharply in 2022, making deposit growth for residents show an even greater degree of contrast with loan growth. This is clearly linked to the low consumer expectations of residents amid the COVID-19 outbreaks and reflects the decline in residential demand for housing brought about by the slump in the real estate market.
The rise in government leverage last year, especially the rise in local government leverage, mainly reflects the consequences of countercyclical adjustment from the central to the local level through government leverage increases in the face of a weak economy. The local government leverage ratio rose by 2.5 percentage points to 29.0% from 26.5% at the end of 2021. The increase in the local government leverage ratio was a major reason for the general decline in local fiscal revenue and the increase in deficit due to rigid growth in fiscal spending, in addition to the factor of the fiscal initiative to leverage infrastructure investment. The report pointed out that for the whole year of 2022, the growth rate of public revenue was -2.1%, but fiscal expenditure still rose by 6.1%, and there was again a gap between the growth rate of fiscal revenue and fiscal expenditure, creating a certain deficit pressure for government departments and constraining the government's space to raise expenditure in the future. in 2022, the revenue of local government funds, mainly from land concessions, was RMB 7.38 trillion, down by more than RMB 2 trillion compared with that of 2021. Local government funds not only failed to meet the 0.4% growth target budget set at the beginning of the year but also had a relatively large net decline.
The changes in the macro leverage ratio basically reflect the consequences of China's overall economic trend and policy changes last year. In terms of changes in the macro leverage ratio, the report raised several issues of concern in the changing economic and financial situation last year: First, the decline in economic growth pulled up the macro leverage level. Last year, the growth rate of total social debt fell back to 9.5%, the growth rate of social finance stock fell back to 9.6%, and the growth rate of M2 was maintained at 11%. On the one hand, the growth rates of both debt and social finance stock were the lowest in recent decades. On the other hand, the growth rate of money is higher than the growth rate of social finance stock, and the growth rate of social finance stock is higher than the growth rate of debt.
In the opinion of the researchers at ANBOUND, the decline in economic growth means a decline in input-output efficiency and an increase in the burden of debt accumulation, which puts the sustainability of economic growth to the test and makes future growth increasingly burdensome. The gap between the growth rate of money and the growth rate of social finance indicates that the effect of monetary policy is weakening, and the increasing money supply cannot promote the effective expansion of social credit, much less bring about a sustainable economic recovery. The decline in the growth rate of corporate leverage and the unchanged leverage ratio of residents are more the result of unstable market expectations under the changing market environment.
The report provides an outlook on the trend of macro leverage in the new year, which is still expected to rise in 2023, but at a lower rate than in 2022. It notes that economic growth in 2022 was most affected by the decline in consumer spending and that this adverse factor has eased considerably, with a more substantial increase in residential consumption expected this year. Investment growth, on the other hand, is more affected by the policy, and manufacturing investment growth may also fall back a bit, dropping below 8% year-on-year. Whether real estate investment can have a stronger recovery and infrastructure investment can remain at a higher growth rate is very dependent on the strength of policy. If China's real GDP growth rate in 2023 turns out to be 4.5% as expected by most international agencies, the macro leverage ratio will rise by about 7 percentage points for the whole year. Assuming that the economic growth rate can reach 5.5%, the macro leverage ratio will only rise by about 5.5 percentage points, which is only half of the increase of the previous year.
The report points out that the key to stabilizing the country's macro leverage ratio is to stabilize economic growth. Although the expansion of debt may drive the macro leverage ratio up in the short term, the leverage ratio will stabilize in the future as economic growth returns to the level of potential output. On the issue of "deleveraging" and "risk prevention" over the years, researchers at ANBOUND have previously pointed out that achieving economic recovery and maintaining growth, as well as realizing a greater denominator, would be the basis for the current financial risk prevention. Under the premise of stable leverage, the recovery of the market and the promotion of monetary policy will continue to promote a reasonable growth of debt and make it compatible with economic growth. At present, China's economy has shown obvious recovery momentum, which provides favorable conditions for maintaining a reasonable and stable macro leverage ratio in the future. The focus of future macro policies should be on supporting and encouraging the recovery of market confidence and enhancing the endogenous momentum of the economy.
Final analysis conclusion:
Against the backdrop of residents' active tapering and enterprises' weak willingness to invest, the rise in China's macro leverage last year was due to factors such as debts being borne by the policy, yet importantly there is a decline in economic growth. With the economy gradually recovering in 2023, China needs to consider boosting and consolidating market confidence to increase consumption and investment demand, thereby achieving stable leverage.
