China's deleveraging campaign bore some early fruits...

Starting from the second half of 2016, the Chinese authorities set out to tackle the indebtedness issue of its corporate sector and inaugurate a campaign of "deleveraging" as the debt of China's corporate sector rose to an unprecedentedly high level (166.4% of GDP as of end-2016) which exposed a material threat to the country's debt sustainability and financial stability. (Figure 1)

China

In the following two years China's authorities deployed a number of policy initiatives to curb further rise of corporate debt level, including: (i) implementing neutral monetary policy with some tightening biases; (ii) cleaning up a large number of zombie companies to address the "soft budget" problem; (iii) disciplining state owned enterprises (SOEs) and local government financing vehicles (LGFVs) from over-borrowing; (iv) preventing banks from lending money to certain industries with serious overcapacity; and (v) clamping down China's gigantic shadow banking sector. (Please see our previous report of Early fruits of corporate deleveraging add to growth resilience)

The authorities' efforts to deleverage China's corporate sector bore some early fruits. As of end-2017, China's corporate debt increased by 160.3% of GDP, the slowest pace since 2011. As reported by the National Statistics Bureau (Figure 2), the leverage ratio of Chinese non-financial firms, which is defined as the ratio of their total liabilities to total assets, declined further in 2017. However, such a decline appeared to be uneven as private firms' leverage ratio even rose in 2017 in contrast to the trend of that among SOEs.

SOE

...however, deleveraging efforts weighed on private enterprises

The deleveraging measures implemented by China's authorities also have the side effect. The monetary tightening and clamp-down of shadow banking activities cut firms, in particular private and small ones, off credit supply which they used to live on; the strengthened control of SOEs and LGFV debt dampened economic activities and investment; the clean-up of zombie companies and overcapacity in certain industries led to more unemployment in the society. Worse is the unexpected escalation of US-China trade tensions in early 2018, which severely dampened the confidence of both investors and consumers.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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