Xi Yanchun:

Ladies, gentlemen and friends from the media: Good afternoon! I am pleased to be attending the briefing on this subject—the debt issue in China—which draws considerable concern from all of us. We held a briefing last week with the participation of Prof. Li Yang from the Chinese Academy of Social Sciences, and he exchanged his views with us. After the press conference, some friends from the media asked whether it was possible to invite some governmental officials to talk on this issue, too. There are many administrative departments getting involved in the issue, so we have taken efforts to invite five scholar-like-officials with solid professional academic backgrounds to share their thoughts with us.

Please allow me to introduce them first: Mr. Sun Xuegong, Deputy Director General of Fiscal and Financial Department of the National Development and Reform Commission, Mr. Wang Kebing, Deputy Director General of the Budget Department of the Ministry of Finance, Madam Ruan Jianhong, Deputy Director General of Statistics Department of the People’s Bank of China, Mr. Wang Shengbang, Deputy Director General of Prudential Regulation Authority of the China Banking Regulatory Commission and Mr. Bao Xiangming, the Secretary-General Assistant of the National Association of Financial Market Institutional Investors. The five guests we have invited here will communicate and exchange views with us. Now let’s give floor to one of the speakers for a brief introduction before the session of interaction. Mr. Sun Xuegong, please.

Sun Xuegong:

Media friends, good afternoon! We are more than willing to share with you our views on China’s debt issue, which has drawn immense interest from you. First of all, I’d like to make a succinct introduction with some background knowledge for you. Our central government has laid considerable emphasis on the issues of debt and high leverages, as the latter was listed as one of the five primary tasks for the economy this year at the Central Economic Work Conference held at the end of last year. The meaning of deleveraging signals the solutions and treatments of the debt issue, which incorporates all the joint efforts among the departments represented by the people seated here. The work has been pushed forward smoothly.

Next, please allow me to make several points regarding the practical methods directed towards the debt issue in China. First of all, China’s total debt and leverage ratios are not high, but they are growing rapidly and expanding in a less balanced landscape. Debt is by no means an unfamiliar word to us, but when it comes to the total debt of a state, it involves statistics regarding the differences between scopes and calibers. Because of the statistics in different calibers, the present size of China’s total debt and leverage ratios has led to different estimations ranging from 200 to 300 percent that are likely known by the media. But when the statistics have to be used on the international stage, those ratios will be calculated with a unified caliber. Whether it’s 200 or 300 percent, the size of China’s total debt and leverage ratio are not very high and are at a medium level if compared to other major economies. There are a number of major developed economies whose total debt and leverage ratio are higher than those of China.

In the past few years, we have indeed faced problems from the fast rise of the leverage ratio as well as from unbalanced debts. Compared to other countries, our structure has witnessed a low leverage in governments and residents but high ratios in non-financial sectors where the debts have amassed.

Second, we must take an overall and subjective view of China’s debt issue. The debt issue in China has taken shape based on the country’s peculiar situation in which China, as a developing country, is trying hard to catch up with developed countries. Throughout the process, the leverage will often rise to high ratios. Meanwhile, based on the economic structures, the size of deposits will always hover around 50 percent, which is obviously higher than the international standard. The huge deposit size will eventually cause different financing structures, judging from which the capital market in China has remained immature as the size of its equity financing is far less than that of developed countries. Enterprises from the non-financial sector still take indirect financing as their favorite means of economic funding, which in turn results in comparatively high debt rates. Therefore, the high leverage ratios from the non-financial sectors are becoming growing pains for the companies developing in the unique financial landscape and under the special impact of the country.

The high debt has caused a negative impact, which, to some extent, jeopardizes the operation of enterprises and financial institutions. However, till now, the risks have remained in control. The high leverage ratios, especially those for enterprises, have increased the financial costs of those companies and led them to debt defaults. A few regions and industries have reported broken debt chains since 2011, from which, however, the risks have already been controlled through the joint efforts of governments and departments at all levels. The debt risks of the enterprises called by banks as non-performing loans are putting the economy at stake by their growing size. Considering the relevant sufficient provisioning of the commercial banks in China and their good fiscal conditions, they are able to counteract the losses caused by non-performing loans. Therefore, the debt risks of enterprises will not fundamentally shake the financial system of our country, especially the stability of the banking sector.

Third, we have to adopt comprehensive policies to prevent and resolve the debt risks. Despite my previous remarks on their controllable natures, the possibility of seeing an enlarging and prevailing debt risk without taking any actions will definitely broaden the negative impact when they are interacting with other elements. That’s why the central government gives their supreme attention to the issue and has ordered deleveraging, which generally speaking will be fleshed out in the following points. First, we need to maintain the stable momentum of the economic development in view of macro perspectives, because without the stability of the macro economy, the leverage ratios will continue to rise amid deteriorating conditions of national enterprises. Therefore, the debt issue should be dissolved by constant economic development during which more proactive policies and measures should be adopted to ensure that economic growth stays within a reasonable range. Second, the strategies for deleveraging should be arranged orderly, otherwise the harm of over-speeding will be as fatal as the risks caused by the over-growing leverage ratios. Therefore, our primary job is to constrain the leverage ratios uncontrollable speeds by means of effective control over the surpluses so that the absolute level can be guaranteed to decline. Third, the leverage should be optimized structurally as the policies of deleveraging should be differentiated towards the external departments of enterprises. Meanwhile, in dealing with the different industries and structures of debt maturities, the proactive and preventive policies should be adopted alternately depending on the different phases of economic cycles so that the work of deleveraging can run smoothly and orderly.

Fourth, deleveraging relies heavily on supply-side reform in addition to a certain number of measures and comprehensive polices. The decreasing leverage ratio fundamentally relies on the releasing of economic vitality and creativities and giving rise to productivity. In doing so, we need to streamline administration and delegate powers to the lower levels, reform state-owned enterprises by merging and reorganization, clear out zombie companies, dissolve industrial overcapacities and scrap consumption taxes—a diversity of measures--to ensure supply-side reform for the release of market vitality, the dropout of low-efficient enterprises, the shift of capitals towards high-efficiency producers, the profitability of enterprises and their capabilities to pay off debts. Second, we need to deepen our reform in the capital market, completing multi-layered equity financing market, regulating the bond market, building a modern financial market system by coordinate direct and indirect financing services and increasing the rates of direct financing. Third, we need to continue reforming the regulatory bodies supervising both the interest and FOREX rates to improve the efficiency of the market with the best allocation of financial resources.

In conclusion, the debt risk in China has remained safe and controllable, as long as our economic growth fluctuates within a reasonable range, structural reform obtains substantial achievements and comprehensive measures can be pushed forward effectively, so that the leverage will be stable and the debt defaults which are still few and partial will be unlikely to trigger a systematic hazard. That’s my introduction. Now let’s give the floor to your questions.

Xi Yanchun:

Mr. Sun, thanks for your introduction.

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