According to a government-backed think tank, China's debt will likely hit a new record this year as the central bank tries to boost credit and shore up the struggling economy.
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According to Zhang Xiaojing, director of the National Institution for Finance and Development, the overall leverage ratio as a percentage of gross domestic product is projected to increase by 11.3 percentage points to around 275% this year. He said that the rise was due to the slowdown in economic growth.
Zhang said that a temporary increase in the ratio won't bring too much risk in an interview. He said that the balance sheet still needs to expand, and the economy needs to leverage up, and the central bank stance is that it needs to expand.
He is also the director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences and advises the central bank and other government agencies.
China has been trying to control the leverage ratio since 2017 after prior stimulus fueled debt and increased financial risk in the economy. The campaign stopped in 2020 when the government ramped up the stimulus after the coronaviruses hit. The debt ratio went up by 23.6 percentage points that year, according to estimates from the NIFD.
This year has seen a return to Covid outbreaks and lockdowns, with Beijing announcing additional stimulus to boost growth. Along with a persistent property slump and the government's commitment to its Covid Zero approach, economists say that the official annual growth target of about 5.5% is in jeopardy.
With limited options for tighter monetary policy overseas, the People's Bank of China has signaled that its stimulus would focus on boosting credit rather than lowering interest rates. It recently underscored that shift by removing a long-standing pledge to keep the debt ratio stable in its quarterly report. Consumers are hesitant to take on more debt because of the uncertain economic outlook. Household debt, a proxy for mortgages, shrank in two of the first five months of 2022, an unprecedented decline. That caused a debate over the risk of China falling into a balance sheet recession similar to what some argue happened in Japan in the 1990s. That country s residents and companies tried to reduce debt by cutting spending and investing, but that only exacerbated the economic slump.
Despite the fact that mortgages are unlikely to keep shrinking, Zhang remains optimistic about China's credit growth outlook this year. He predicted that household leverage will increase by two to three percentage points.
He said there was very little chance that there would be a decline in household leverage.
The lowering of mortgage rates will help to stabilize mortgages, as well as government aid for the housing market, he said. He said that the debt structure within the residential sector will likely be healthier as household operating loans grow. The household leverage has remained steady at around 62% since late 2020, after surging from around 40% in 2016 according to NIFD data.
The government could boost the economy by issuing special bonds, which could be used to boost the economy, according to Zhang.
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