Article/Liu Mingyan, columnist of Sina Financial Opinion Leader (WeChat official account kopleader)
As long as the financial deleveraging with the main purpose of preventing financial risks is adjusted to a real stable leverage, and multiple measures are taken simultaneously, high-quality economic growth will be achieved.
In the third quarter of this year, China's economy grew by 6.5%, a new low since June 2009, basically in line with market expectations. However, M2 grew by 8% year-on-year in October, the second time in the year to hit a new low since 32 years. At a time when the international economic environment is becoming increasingly complex and the problem of domestic private enterprises' difficulty in financing is becoming increasingly prominent, the author believes that, As long as the financial deleveraging with the main purpose of preventing financial risks is adjusted to a real stable leverage, and multiple measures are taken simultaneously, high-quality economic growth will be achieved.
Excessive emphasis on financial deleveraging cannot effectively reduce the leverage ratio of enterprises
The general indicator to measure the leverage ratio of a country's economy or economic sectors is total liabilities/GDP. According to the data of the Bank for International Settlements, China's total leverage ratio is 238%, slightly lower than that of developed countries such as Japan, Canada, France, the United States, but nearly 100 percentage points higher than that of emerging market countries such as Brazil, India, Russia, and the leverage ratio of enterprises, China's 141% ratio is significantly higher than that of major economies in the world, almost twice that of the United States and the United Kingdom, and 14 percentage points higher than that of France, which has the second highest corporate leverage ratio, while the leverage ratio of the Chinese government and residents is at a lower level in the world. Therefore, the high leverage ratio of the Chinese economy is mainly reflected in the high leverage ratio of enterprises and excessive financial liabilities, Therefore, the core of deleveraging is to reduce the leverage ratio of enterprises.
Financial deleveraging inhibits the financing ability of banks and increases the financing difficulties of private enterprises. Since the liabilities of enterprises mainly come from bank loans and off balance sheet financing, the Chinese financial regulatory authorities, in order to prevent financial risks, have implemented the macro prudential assessment (MPA) assessment on banks since 2017, and listed the off balance sheet financing of banks, mainly entrusted loans, trust loans, acceptances and other off balance sheet assets (investment assets of bank financing) in the broad sense of credit, That is, the transfer from off balance sheet to on balance sheet increases the scale of banks' risk weighted assets. In the case of uncertain capital scale, the capital adequacy ratio of those medium-sized banks with large off balance sheet businesses is facing increased assessment pressure. In order to meet regulatory requirements, banks have to shrink the scale of off balance sheet businesses. Data shows that in the first 10 months of this year, bank trust loans decreased by 1.28 trillion yuan year-on-year, entrusted loans decreased by 1.25 trillion yuan year-on-year, acceptance bills decreased by 592.5 billion yuan year-on-year, while loans only increased by 1.38 trillion yuan in the same period, which ultimately led to a year-on-year decrease of 2.79 trillion yuan in the scale of social financing, down by 15%. At present, the off balance sheet business scale of banks is about 25 trillion yuan, accounting for 13% of the social financing scale. Since these high cost funds mainly flow to private enterprises, if such financing scale is continuously reduced, it will further aggravate the financing difficulties of private enterprises, and may aggravate the default of corporate bonds and corporate loans, resulting in more non-performing assets of banks, and inhibiting the financing capacity of banks.
The root of high leverage ratio of Chinese enterprises lies in the economic growth mode of over reliance on investment and the insufficient financing function of the stock market. Without substantial change in this pattern, financial deleveraging alone cannot substantially reduce the leverage ratio of enterprises. For a long time, China's economic growth has relied on fixed asset investment. At present, this situation has not changed substantially. In the first three quarters of this year, the total amount of fixed asset investment was 48.34 trillion yuan, while the total amount of social retail goods in the same period was only 27.4 trillion yuan, and the investment scale was about 1.76 times of consumption. Since the recovery cycle of fixed asset investment is mostly longer than the loan period, Therefore, greater debt is needed to keep investment going. In the case that it is impossible to reduce the scale of corporate debt through drastic bankruptcy, thus reducing the leverage ratio, financial deleveraging alone may compress the supply of short-term working capital, further reducing the efficiency of capital utilization. In addition, the low proportion of Chinese enterprises' direct financing also inhibits them from reducing leverage. Data shows that since 2002, China's stock market has raised 6.5 trillion yuan accumulatively for non-financial enterprises, accounting for less than 4% of the total social financing, and the stock market value is less than 40% of GDP, while that of the United States is as high as 150%. This is the key reason for the low leverage ratio of American enterprises - the United States has a developed and mature stock market, so that enterprises do not have to rely on bank loans excessively for financing. However, China's stock market needs comprehensive and in-depth reform to restore its financing function, which is difficult to work in the short term. Therefore, it is unrealistic to hope to increase equity financing and reduce leverage in China.
Stabilizing financial leverage and reducing corporate tax burden are feasible options for reducing leverage
Radical financial deleveraging reduces the supply of bank funds, raises the cost of funds, and increases the financial cost of enterprises, which is not conducive to reducing the leverage ratio of enterprises. Since the financial regulatory authorities implemented a relatively aggressive financial deleveraging policy in 2017, the growth of social financing scale has slowed down due to the compression of off balance sheet businesses by banks. Since April 2017, M2, the broad money, fell below 10% for the first time, and again fell to 8% in June and October this year, which led to a year-on-year decrease of 2.79 trillion yuan in social financing scale in the first 10 months, a decrease of 15%, As a result, the difficulty and high cost of financing of private enterprises were aggravated, which made the cost of financing of enterprises rise year on year, and even triggered a wave of defaults on corporate bonds, which to some extent pushed up the leverage ratio of enterprises. On the premise that the leverage ratio of enterprises is rigid, the central bank can consider turning the monetary policy to neutral, and actively reduce the interest rate of stock MLF and the deposit reserve ratio under the condition of managing the general gate of money supply, so as to reduce the capital cost of banks and stabilize the scale of banks' off balance sheet assets, To avoid the rapid contraction of off balance sheet financing to offset the effectiveness of the monetary policy of reducing reserve ratio, so that M2 continued to decline, and eventually led the economy into recession.
Reduce the tax burden of enterprises, improve their profitability and ability to accumulate endogenous funds, reduce their dependence on external debt, and gradually reduce leverage. The World Tax Index 2017 of the World Bank shows that China's macro tax burden (tax/profit) is 68%, far higher than Germany's 49%, the United States' 44% and the United Kingdom's 31%. The excessive tax burden has eroded the profitability of enterprises, making it difficult for enterprises to accumulate funds needed for development, relying excessively on external debt, and thus constantly increasing the leverage ratio of enterprises. At present, all walks of life in China recognize the importance of reducing corporate tax burden, but it is easier said than done. It is suggested to reduce the ratio of value-added tax, income tax rate and social security fee of enterprises as soon as possible, so as to reduce China's macro tax burden to a level comparable to that of the United States, thereby significantly reducing the tax burden of enterprises, improving their profitability, and gradually reducing their leverage ratio. At present, the biggest obstacle to government tax reduction comes from huge expenditure, including export tax rebate and new energy industry subsidies of nearly 2 trillion yuan per year. It is suggested that the subsidies to enterprises should be changed to tax reduction, or even free for a certain period of time. This can not only avoid a large number of illegal acts of defrauding subsidies, but also avoid the distortion of financial subsidies on social resource allocation, Moreover, it can reduce the financial burden of the government, which can be described as one stone and three birds.
This year marks the 40th anniversary of China's reform and opening up. China's economic achievements come from the great reform and opening up. The essence of reform and opening up is to firmly promote the market economy, rather than return to the stale planned economy. Therefore, in the face of the high leverage problem accumulated over a long period of development, we should not hope to solve it quickly by planned economic means, but only by market-oriented measures, Only then can we gradually reduce the leverage ratio in economic growth and realize a virtuous circle of the economy.
(The author of this article is a researcher at the University of International Business and Economics. He works for China Minsheng Bank.)
