Liuminin, author of the editorial board of the documentary/new wave financial opinion (Bkopleader)

To the extent that financial deleveraging, with the primary purpose of safeguarding financial risks, is to be transformed into a real, stable leverage, it is important to achieve high-quality economic growth.

China’s economic growth of 6.5 per cent in the third quarter of this year, which has created a new low since June 2009, is essentially in line with market expectations. However, in October M2 grew by 8 per cent on the same basis as in October, in the second year, at a time when the international economic environment was becoming more complex and the problems of financing the financing of domestic private-sector enterprises were becoming increasingly visible, the authors argued that, as long as financial deleveraging the main purpose of safeguarding financial risks was to be a real and stable leverage, so much was done to achieve high-quality economic growth.

Excessive emphasis on financial leverage cannot effectively reduce the leverage of enterprises

While the general indicator of leverage for a country’s economy, or economic sector, is total/GDP, Bank for International Settlements (BIS) data show that China has a total leverage rate of 238 per cent, slightly lower than in developed countries such as Japan, Canada, France, the United States, but higher than nearly 100 percentage points in emerging market countries such as Brazil, India and Russia, China’s high economic leverage rate is significantly higher than in major global economies, almost twice the United States and the United Kingdom, 14 percentage points higher than in France, where the enterprise leverage is high, and the Chinese Government and the population are at a lower global level.

Financial leverage inhibits the ability of banks to finance and increases the financial difficulties of private enterprises. Since the liability of the enterprise derives mainly from bank loans and out-of-pocket financing, the Chinese financial regulatory authority, for financial risk prevention reasons, introduced a macroprudential assessment of the bank (MPA) starting in 2017, which puts the bank’s out-of-pocket finances, mainly out-of-pocket assets such as loans, trust loans, foreign exchange tickets (invested assets of bank finances) under a broad credit scheme, which increases the size of the bank’s weighted risk assets, and, in the case of capital uncertainty, the medium-sized banks with larger off-the-board operations face increased pressure on capital adequacy to meet the banking requirements. The data show that the first 10 months of this year saw a reduction of $128 million in bank trust loans, a decrease of $12.25 million in loans, a reduction of $592.5 million in exchange tickets, and an increase of only $138 million in loans for the same period, which eventually resulted in a decrease of $279 million in the size of social finance and a decrease of 15 per cent. The current size of banks’ out-of-pocket operations is approximately $2.5 trillion, or 13 per cent of the size of social finance, and because these high-cost funds are mainly channelled to private-sector enterprises, the continued compression of such financing will further exacerbate the financial difficulties of private-sector enterprises and may exacerbate the default of corporate debt and business loans, resulting in additional bank failures and inhibiting bank financing capacity.

In the absence of substantive changes in the pattern of overdependence on investment for economic growth and inadequate equity financing, financial leverage alone cannot substantially reduce enterprise leverage. China’s economic growth has long been dependent on investment in fixed assets, a situation that has not changed substantially, with fixed asset investments totalling $48.34 trillion in the first three quarters of the year, while the total value of retail social goods totalled only $27.4 trillion in the same period, with an investment size of approximately 1.76 times that of consumption, since most of the fixed asset investment recovery cycles are longer than the duration of the loan, thus requiring greater debt to remain sustainable, and in cases where it is not possible to reduce the size of the enterprise’s debt through a heterogeneous insolvency, thus reducing the leverage of short-term commercial provision that could be reduced by financial leverage. In addition, the low share of direct financing by Chinese enterprises inhibits their leverage. Data show that since 2002, Chinese equity markets have accumulated $650 million for non-financial enterprises, accounting for less than 4 per cent of total social financing, and stock market value is less than 40 per cent of GDP, while the United States share is as high as 150 per cent, which is the key cause of low corporate leverage in the United States - the United States has developed well-established equity markets, which make it unnecessary for enterprises to rely excessively on bank lending. However, in order for the Chinese equity market to resume its financing function, comprehensive and in-depth reforms are required, which are difficult to achieve in the short term, and it is not realistic to expect additional equity financing leverage in China.

Stable financial leverage and tax deductibility are currently viable options for leverage.

Radical financial leverage reduces the supply of bank funds, raises the cost of money, increases the financial costs of enterprises and is not conducive to lower corporate leverage. The scale of social financing has been slowed down since the financial regulatory authorities implemented a relatively radical financial deleveraging policy in 2017, with the opening of out-of-bank lending operations, which began in April 2017 with the first collapse of broad-based M2 to 8 per cent in June and October this year, which resulted in a similar reduction of $279 million in the size of social financing over the previous 10 months and a 15 per cent reduction in the amount of financing, thus increasing the cost of private enterprise financing and raising even the level of corporate bond default. Subject to the rigidity of corporate leverage, the Bank could consider converting monetary policy to a neutral one and, in the context of the overall gate to manage good currency provision, proactively lowering the interest rate for the stock of MLF and actively reducing the deposit reserve rate, thereby reducing the bank’s financial cost while stabilizing the bank’s out-of-pocket assets, avoiding the rapid contraction of out-of-pocket finance to obviate the effects of the quasi-monetary policy, leading to a sustained downturn in M2 and eventually introducing the economy into recessionary swamps.

Reducing the burden of corporate taxes, increasing the profitability of enterprises and building the capacity of domestic sources of finance, reducing dependence on external debt and gradually reducing leverage. The World Bank’s World Tax Index 2017 shows that China’s macro-tax (tax/profit) is 68 per cent, far higher than Germany’s 49 per cent, the United States 44 per cent and the United Kingdom 31 per cent, and that the excessive tax burden erodes the profitability of the enterprise, leading to a business enterprise.