MNI POLICY: China Leverage Grows More Slowly in Q2: Research

     BEIJING(MNI) - Growth in China's macro leverage ratio slowed sharply in the

second quarter, raising concerns that efforts to crack down on excessive

indebtedness may be outweighing economic stimulus and stifling growth, research

by state-level think tank the National Institution for Finance and Development

showed.

     Here are main points from a briefing note on the research:

     --China's macro leverage ratio gained 0.7 percentage point in Q2 to 249.5%,

down from a 5.1pp quarter-on-quarter rise in Q1. The leverage ratio is likely to

increase by 7 to 8pp for the year, in order for authorities to meet their

objective of stabilising growth, the NIFD estimates.

     --Slower nominal GDP growth in Q1 was largely due to regulations targeting

local government's implicit debt in 2018 and also to the deteriorating external

environment, including trade tensions with the U.S.

     --Household leverage has grown almost as fast as in the U.S in the ten

years right before the subprime crisis, even as growth in disposable income

falls. The ratio rose to 55.3% in Q2, from 53.2% at the end of 2018. The

regulator should continue to exercise strict control over the property market

and to curb expectations of rising house prices. Real interest rates also need

to be lower to stabilise the ratio.

     --Non-financial corporate debt fell by 1.1pp in Q2, as shadow banking

contracted, down from a 3.3pp gain in Q1. Corporate bond defaults are likely to

increase further, after over 80 bond defaults involving about CNY60 billion in

H1, as private companies struggle with high interest rates and declining

profitability.

     --The government's leverage ratio rose to 38.5% in Q2 from 37.7% in Q1,

fueled by front-loaded local government borrowing, even as the central

government's leverage eased slightly by 0.04pp. Local governments used 71% of

their total debt quota for the year in H1. Local government are set to pick up

issuance of special bonds, which are repaid by income from infrastructure

projects they fund, in the second half. The authorities are expected to tackle

local governments' implicit debt load, at about CNY43 trillion, with a series of

refinancing measures.

     --The financial sector continued to deleverage, led by declining interbank

wholesale transactions and the shrinking shadow banking business. The central

bank should provide more liquidity for small lenders, which have faced a growing

challenge to obtain short-term funds since the takeover of Baoshang Bank in May.

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

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MGQ$$$]