Managing Financial Risks Amid China's Economic Slowdown (eBook)

Series Preface 6
Introduction: Structural Slowdown to China’s Economic Growth 8
International Economic Background of China’s Economic Slowdown 8
China’s Economy in the New Normal 9
About China Finance and Development Report 12
Contents 18
About the Editor 19
1 Interest Burden and Debt Sustainability 20
1.1 Latest Progress of Deleveraging in China’s Real Economy Sector 20
1.1.1 Household Sector Leverage Swiftly Increased, Up Nearly 5% Points in 2016 22
1.1.2 Leverage Ratio of Non-financial Enterprises Ceased to Increase Yet Corporate Deleveraging Remains a Top Priority 22
1.1.3 Slight Deleveraging of Government Sector May Be a Short-Lived Phenomenon 24
1.2 Estimate of Interest Payment in Real Economy Sector 26
1.2.1 Household Sector 27
1.2.2 Non-financial Corporate Sector 27
1.2.3 Government Sector 29
1.2.4 Total Interest Payment of the Real Economy Sector 33
1.3 Analysis of Debt Sustainability 34
1.3.1 Interest Burden of the Real Economy Sector 34
1.3.2 Perspective of Government Debt Sustainability 36
1.3.3 Perspective of Sovereign Balance Sheet 37
2 Sophistication of China’s Financial System 39
2.1 Bank-Dominated Sophisticated Financial System 39
2.1.1 Transformation of China’s Financial System Structure 39
2.1.1.1 Share of Non-credit Financing Spiked 40
2.1.1.2 Rising Status of Nonbanking Financial Institutions 40
2.1.1.3 Defects Exist in Interest Rate and Exchange Rate Mechanisms 41
2.1.1.4 Financial Market Flaws Persist 41
2.1.2 Theory of Money and Credit 42
2.1.2.1 Financial System Based on “Indirect Financing” (Bank-Dominated Financial System) 42
2.1.2.2 Financial System with the Inclusion of “Direct Financing” (Market-Dominated Financial System) 44
2.1.2.3 Sophisticated Financial System 45
2.2 Shadow Banking and the Shadow of Banks 46
2.2.1 Manifestations of Shadow Banking in China 46
2.2.2 Off-Balance-Sheet Operations of Shadow Banks 47
2.2.2.1 Credit Creation Through Partnership Between Banks and Nonbanking Financial Institutions 47
2.2.2.2 Credit Creation Through Interbank Business 50
2.2.2.3 Off-Balance-Sheet Operation Through the Creation of NPL Fund with AMCs 52
2.2.3 Financial Risks of China’s Shadow Banking System 52
2.2.3.1 Liquidity Risks Arising from Maturity Mismatch 53
2.2.3.2 Credit Default Risks 53
2.2.3.3 Risks of Leverage Ratio 54
2.3 Credit Aggregate 55
2.3.1 Creation of Non-financial Sector Credit Aggregate Indicator 55
2.3.1.1 Bank (Domestic and Foreign) Credit 55
2.3.1.2 Domestic and Overseas Non-financial Bonds 57
2.3.1.3 Shadow Banking 57
2.3.2 Credit Creation and Sources 59
2.3.2.1 Credit Creation Sectors 59
2.3.2.2 Credit Source Sectors 59
2.3.3 Internal Financing of Financial Sector 65
2.4 Transformation of Financial Regulation Framework Under the Sophisticated Financial System 66
3 Corporate Leverage from the Perspective of Return on Assets—Two-Level Deviations of Macro and Micro Leverage Ratios 68
3.1 Manifestations of Return on Assets 68
3.2 Manifestations and Analysis of Micro-leverage 78
3.2.1 Manifestation of Micro-leverage 78
3.2.2 Leverage Ratios of Different Sectors 79
3.2.3 Industry Concentration, ROA and Leverage Ratio 81
3.3 Two-Level Deviations of Macro and Micro Leverage Ratios 83
3.3.1 Deviation Between the Leverage Ratio of Listed Companies and That According to the NBS 83
3.3.2 Deviation Between Micro Leverage Ratio and Macro Leverage Ratio 84
3.4 Policy Recommendations 88
References 89
4 Debt Risks of China’s Government Sector 90
4.1 Current Status of China’s Government Liabilities: Scale and Structure 90
4.1.1 Estimating the Scale of China’s Local Government Debt 91
4.1.2 Further Reflections on the Debt Boundary of Local Governments 92
4.1.3 Analysis of Local Government Bonds and LGFV Bonds 95
4.1.3.1 Basic Status of Local Government Bonds 95
4.1.3.2 Basic Status of CIBs 101
4.2 China’s Government Debt from the Perspective of International Comparison and Asset-Liability Ratio: Risks Are Generally Within Control 107
4.2.1 Government Debt Ratio Is Relatively Safe 107
4.2.2 Sovereign Balance Sheet Is Relatively Robust 108
4.3 Trends of Local Government Debt Risks Under the New Governance Structure: Improvement Coexists with Concerns 111
4.3.1 Debt Swap and Liquidity Risk Mitigation 111
4.3.2 Introduction of PPP Model and Abatement of Debt Pressures 112
4.3.3 Transition of Financing Platforms and the Emergence of Alternative Financing Schemes 114
4.4 Analysis and Evaluation of Province-Specific Government Debt Risks: Regional Risks Warrant Attention 116
4.4.1 Analysis Based on Issuance Interest Rate and Risk Premium 116
4.4.1.1 Local Government Bond Issuance Interest Rate and Risk Premium 116
4.4.1.2 Issuance Interest Rate and Risk Premium of CIBs 120
4.4.2 Analysis Based on Interest Rate Risk Premium in the Secondary Market 125
4.4.3 Risk Analysis Based on Debt Indicators 127
4.5 Evolution and Scenario Simulation of Government Leverage Ratio: Quality Growth Is Key to Debt Sustainability 131
4.5.1 Theoretical Rationale 131
4.5.2 Conditions for the Stability of Local Government Debt-to-GDP Ratio 132
4.5.3 Scenario Simulation of Overall Leverage Ratio of China’s Government Sector 134
4.5.4 International Experience for the Accumulation and Solution of Government Debts: UK, US and Japan 136
4.6 Reflections and Recommendations of Resolving Government Debt Risks: More Substantive Reform Initiatives Should Be Introduced 141
4.6.1 Further Enhancing the Budgetary Constraint of Local Governments 141
4.6.2 More Private Capital Should Be Encouraged to Invest in Infrastructure and Public Services 144
4.6.3 Further Adjusting Central-Local Fiscal Relationship 145
References 147
5 Status and Prevention of Banking Sector Risks 148
5.1 Credit Business Risks and Prevention 148
5.1.1 NPL Status and Characteristics 148
5.1.1.1 Customer Structure 150
5.1.1.2 Industry Structure 150
5.1.1.3 Geographical Structure 151
5.1.1.4 Risk Level 151
5.1.1.5 Risk Contagion 152
5.1.2 NPL Tendencies and Risk Assessment 153
5.1.3 NPL Disposal and Resolution 154
5.1.4 Analysis of the Impact of Debt-to-Equity Swap 155
5.2 Non-credit Business and Risk Prevention 158
5.2.1 Background of Non-credit Business Development 158
5.2.2 Status of Non-credit Asset Business 159
5.2.2.1 On-Balance-Sheet Non-credit Asset Business 159
5.2.2.2 Off-Balance-Sheet Wealth Management and Asset Management 161
5.2.3 Risk Profile and Prevention of Non-credit Business 163
6 Monetary Policy in the Context of Deleveraging 166
6.1 Change in the Central Bank’s Balance Sheet 166
6.2 Monetary Policy Instrument: Return to Central Bank Lending 168
6.3 RRR Normalization Still Necessary 175
6.4 Interest Rate and Exchange Rate Should Be More Market-Based 177
6.5 Macro-Prudential Policies 180