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September 26, 2017

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China’s leverage ratio rise slowing

The growth of China’s overall leverage ratio has been clearly slowing and is now stabilizing, the state economic planner said yesterday, days after S&P downgraded the country’s sovereign debt rating.

China will focus on lowering leverage ratios among state-owned enterprises and winding down of “zombie firms” to reduce leverage ratios and control debt risks, the National Development and Reform Commission said in a statement on its website.

S&P Global Ratings cut China’s credit rating last week, which followed a similar move by Moody’s Investors Service in May. Both firms cited the risks from China’s rapid build-up in debt and high overall debt levels as a major long-term concern.

S&P said China’s attempts to reduce debt risks so far this year are not working as quickly as expected and credit growth is still too fast.

The NDRC cited the latest data from the Bank of International Settlements which showed China’s overall leverage ratio is still growing, but at a slightly slower pace.

BIS data published last week showed China’s total non-financial debt was 257.8 percent of gross domestic product at the end of the first quarter, up from 250.4 percent in the same period a year earlier, but only a slight increase from 257 percent at the end of 2016.

China’s non-financial corporate leverage ratio fell sequentially for the third straight quarter to 165.3 percent in the first quarter, the BIS data showed.

The BIS warned in September last year that China’s excessive credit growth was signaling a banking crisis in the next three years, while the International Monetary Fund warned this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action.”

One way the government is looking to cut leverage ratios is by converting some of the debt into equity. The NDRC said yesterday that debt-for-equity swap deals worth 1.3 trillion yuan (US$196 billion) and involving 77 companies had been signed through September 22.


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