On May 13, the Chinese State Council held a video conference to deploy and mobilize the issuance of ultra-long-term special national bonds (with terms of 20, 30, and 50 years). In the March “Government Work Report,” authorities had already publicized plans to issue ultra-long-term special national bonds consecutively over the next few years, specifically for “the implementation of major national strategies and the construction of security capabilities in key areas.” This year, the issuance will start at 1 trillion yuan, included in the government fund budget and not counted towards the deficit.
In the previous fourth quarter of 2023, 10 trillion yuan of national bonds were issued and all arranged for local use through transfer payments. The central government undertook the repayment and interest payments, stating that the funds were used to “support post-disaster recovery and reconstruction and enhance disaster prevention and mitigation capabilities.” This 10 trillion yuan of national bonds falls under special debt management but is included in the deficit, leading to an increase in the national fiscal deficit from 3.88 trillion yuan to 4.88 trillion yuan in 2023, with the central fiscal deficit rising from 3.16 trillion yuan to 4.16 trillion yuan, and the fiscal deficit rate rising from 3% to around 3.8%.
From the above events, public opinion generally believes that the Chinese Communist Party has started to “lever up at the central level.” This is because: (1) local debt risks are high, prompting a rush to deleverage. (2) National bonds have higher market acceptance and lower financing costs compared to local debt. (3) The Chinese government’s debt structure is characterized by low central government debt and high local government debt (in contrast to the U.S. and Europe), leading to the view that “local deleverages while the central leverages” is a viable approach.
The article argues that simply increasing the central leverage ratio through the issuance of large amounts of national bonds is merely debt reshuffling with limited effectiveness in solving China’s economic predicament.
Macro Leverage Ratio in China
The macro leverage ratio (the ratio of a country’s total debt to GDP) indicates the overall debt levels of a country. According to the National Institute of Finance and Development (NIFD) report on the “2023 Macro Leverage Ratio,” China’s macro leverage ratio reached 287.8% in 2023, rising by 13.5 percentage points from the end of 2022 and a total increase of 41.2 percentage points since the end of 2019.
China’s macro leverage ratio is significantly higher than the average level of emerging market countries and roughly comparable to the average levels of the U.S. and developed countries. However, two points stand out: (1) From the end of 2008 to present, the rate of increase in China’s macro leverage ratio has significantly surpassed that of the U.S., Japan, developed countries on average, and emerging market countries on average. (2) China’s per capita GDP (1.37 trillion yuan in 2023) is only about one-sixth of the U.S. This signifies that China’s macro leverage ratio is in an abnormally high state.
In the fourth quarter of 2023, the leverage ratio of the household sector had reached 63.5%, already at the average level of developed economies and facing significant debt repayment pressure. For instance, based on data from the Chinese National Bureau of Statistics, the average disposable income per person in China was 39,200 yuan in 2023; however, according to data from the central bank, outstanding personal residential loans at the end of 2023 amounted to 38.17 trillion yuan, non-residential consumer loans (excluding personal residential loans) were at 19.77 trillion yuan, and household operating loans stood at 22.15 trillion yuan, totaling debts exceeding 80 trillion yuan, amounting to 57,000 yuan per person, far surpassing disposable income per capita. It can be said that the household sector is already heavily indebted, with the leverage ratio increasing from 17.90% in 2008 to the current 63.50%, more than doubling with little room for further increase.
In the fourth quarter of 2023, the leverage ratio of the non-financial corporate sector stood at 168.40%, relatively high on a global comparison scale. Particularly, real estate companies, especially private ones, used to be major borrowers, but with the bursting of the property bubble, these companies are now in distress. Additionally, the non-financial corporate sector’s debts include a significant portion of local government’s hidden debts—such as local government financing vehicles based on “land finance,” which are now struggling to continue. Currently, non-real estate private enterprises also lack confidence and are cautious about borrowing. While state-owned enterprises still have borrowing capacity, it is limited. Overall, the non-financial corporate sector has little room for further leverage, reflected in the continued decline in corporate investments.
Central leverage comprises the leverage ratios of the household, non-financial corporate, and government sectors. Since it’s challenging to increase the leverage ratios of the household and non-financial corporate sectors, the Chinese government, in its effort to stimulate economic growth through borrowing, must rely on the government sector to expand debt. Within the government sector, given the high risks of local government debts, the central government has no choice but to increase leverage.
According to data from the Chinese Ministry of Finance, as of the end of December 2023, the national debt balance was 30.03 trillion yuan. Considering that central government general public budget revenue in 2023 was 9.9566 trillion yuan and central government special fund budget revenue was 441.8 billion yuan, the explicit debt ratio of the central government in 2023 was 289%, calculated as 30.03 trillion yuan (national debt balance) divided by 103.984 trillion yuan (central government general public budget revenue of 99.566 trillion yuan + central government special fund budget revenue of 44.18 billion yuan). This ratio is exceptionally high, exceeding the local government debt ratio of 222% in 2023, calculated as 40.737293 trillion yuan (local government debt balance) divided by 183.505 trillion yuan (local general public budget level income of 117.218 trillion yuan + local government special fund budget level income of 66.287 trillion yuan).
Beside explicit debts, both local and central governments in China have significant hidden debts. For instance, the debt of the national railway corporation formed from the restructuring of the Ministry of Railways reached 6.13 trillion yuan as of December 31, 2023. Additionally, policy banks like the China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China held bond balances of 24.3 trillion yuan as of January 2024. These debts fall under the category of implicit debts of the central government.
Therefore, the apparently lower leverage ratio of the central government of the CCP does not imply abundant financial resources but rather reflects the deformity of the CCP’s fiscal system. For the CCP, the current structure of the central-local financial system has become unsustainable.
The issuance of ultra-long-term special national bonds by the CCP this time can only be seen as a temporary solution if not accompanied by a “new round of fiscal and tax system reforms,” structural economic adjustments, and improvements in the international economic environment.
(End of translation)