MNI INTERVIEW: China Deleveraging Must Target SOEs: Advisor

--China Macro Leverage Ratio Jumped To All-Time High in Q1: Zhang

     BEIJING (MNI) - China should focus its deleveraging efforts on state-owned

enterprises, as authorities allow overall debt to rise to stabilise the economy

in the face of headwinds, a government advisor told MNI.

     "State-owned companies should be the major target, particularly the

zombies," said Zhang Xiaojing, deputy director-general of the National

Institution for Finance & Development (NIFD) at the Chinese Academy of Social

Sciences (CASS), noting there was little room for leverage reduction in the

household sector.

     He accepted that some increase in debt levels was necessary to stabilise

the economy, but warned a further burst of loose liquidity from the central bank

could trigger excessive growth in liabilities.

     "We are not saying that leverage cannot be added, but we must control the

pace," Zhang said, adding that a "beautiful deleveraging" bringing debt

reduction while the economy recovers could only be achieved after first passing

through a painful period of restructuring.

     Overall macro leverage rose 5.1 percentage points in Q1 to an historic high

249% of GDP, according to a report from NIFD. This was mainly due to robust bank

lending to companies, which in turn helped fuel an unexpected economic pickup.

     If leverage growth continues at the current pace it would mean a

double-digit percentage rise in debt this year, a similar rate to that of the

period before Chinese authorities launched their deleveraging campaign in 2017,

Zhang warned. Overall leverage fell by 0.3% in 2018.

     Non-financial firms (NFFs) and local governments both saw leverage ratios

pick up in Q1, boosted by borrowing and bond issuance, Zhang noted. Leverage

ratios at NFFs rebounded 3.3 pps to 156.9%, up from 153.6% at the end of 2018 as

outstanding corporate loans increased 17.6% y/y, according to NIFD.

     Local governments front-loaded bond sales as they boosted spending, while

relaxed regulation on their special funding vehicles helped debt raising, he

said, pushing their leverage ratio to 21.4% in Q1 from 20.4% in 2018.

     Zhang said both central and local government should draw on their cash

reserves, which could be as much as CNY33.5 trillion, or 36.6% of nominal GDP,

to boost the private sector and support infrastructure investment, as central

government fiscal spending is constrained by the targeted fiscal deficit of 2.8%

of GDP.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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