China's National Balance Sheet (2015): Leverage Adjustment and Risk Management

248 Pages·2018·6.17 MB·English

by  Yang Li

Yang Li
Xiaojing Zhang
Xin Chang
China’s National
Balance Sheet (2015):
Leverage Adjustment
and Risk Management
’
China s National Balance Sheet (2015): Leverage
Adjustment and Risk Management
Yang Li Xiaojing Zhang
(cid:129)
Xin Chang
’
China s National Balance
Sheet (2015): Leverage
Adjustment and Risk
Management
123
Yang Li XinChang
National Finance andDevelopment Institute of Economics, CASS
Laboratory Beijing
Beijing China
China
Xiaojing Zhang
National Finance andDevelopment
Laboratory
Beijing
China
Translated byFuYili
Sponsored byChinese Fundfor the Humanities andSocial Sciences.
ISBN978-981-10-7732-6 ISBN978-981-10-7733-3 (eBook)
https://doi.org/10.1007/978-981-10-7733-3
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Contents
Part I General Report
1 Main Report: Leverage and Risk Management . . . . . . . . . . . . . . . 3
1.1 Major Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.1.1 National Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . 4
1.1.2 Sovereign Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . 5
1.1.3 Balance Sheets of All Sectors . . . . . . . . . . . . . . . . . . . 6
1.2 Leverage Adjustment and Risk Management . . . . . . . . . . . . . . 11
1.2.1 Description of the Aggregation Method. . . . . . . . . . . . 11
1.2.2 Whole Society Leverage Ratio . . . . . . . . . . . . . . . . . . 12
1.2.3 Leverage Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.2.4 DilemmaBetweenDeleveragingandEnsuringSteady
Growth:MolecularCountermeasureandDenominator
Countermeasure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2.5 Leverage Adjustment and Financial Risk
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.2.6 TheFundamentalWayOutIstoChangetheModeof
Economic Development Through Reform . . . . . . . . . . 19
2 National Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3 Sovereign Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4 Whole Society Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.1 Leverage Ratio of All Sectors . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.2 Leverage Ratio of the Whole Society. . . . . . . . . . . . . . . . . . . . 42
Part II Sectoral Analysis
5 Local Government Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.1 Preparation of Local Government Balance Sheet. . . . . . . . . . . . 47
5.1.1 Estimation of asset items . . . . . . . . . . . . . . . . . . . . . . 49
v
vi Contents
5.1.2 Estimation of liability items . . . . . . . . . . . . . . . . . . . . 52
5.1.3 Some additional explanations on estimation of local
assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.2 Analysis and Assessment of Local Government Debt Risk . . . . 59
5.2.1 First, the Debt Growth Rate Is Still High. . . . . . . . . . . 60
5.2.2 Second, the Financing Structure Tends to be More
Complicated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.2.3 Third, the Liquidity Risk Due to Debt Maturity in a
Concentrated Time Period Should Not Be Ignored. . . . 61
5.2.4 Fourth, Regional and Sectoral Risks Should Arouse
Our Attention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.2.5 Fifth, the Existing Debt Repayment Base Is
Somewhat Unsustainable . . . . . . . . . . . . . . . . . . . . . . 64
5.2.6 Sixth, the Risk Exposure to Contingent Liabilities
Is Widening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.3 Discussion on Some Issues Concerning Local Debts. . . . . . . . . 67
5.3.1 First, Establishing and Promoting a New Local
Financing Framework and PPP Model. . . . . . . . . . . . . 67
5.3.2 Second, Local Debt Swap and Its Impact. . . . . . . . . . . 71
5.3.3 Third,FurtherImprovingtheDegreeofMarketization
of Local Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6 Analysis of Central Government Balance Sheet . . . . . . . . . . . . . . . 77
6.1 The Balance Sheet of the Chinese Government Prepared
by the PBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.2 General Central Government Balance Sheet . . . . . . . . . . . . . . . 79
6.3 The Central Government Balance Sheet as Part
of the National Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . 84
7 Balance Sheet of the Non-financial Corporation Sector. . . . . . . . . . 87
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
7.2 Basic Principles for Indirect Estimation of the Balance Sheet
of Non-financial Corporations . . . . . . . . . . . . . . . . . . . . . . . . . 90
7.3 Indirect Estimation of Total Assets and Liabilities
of Non-financial Corporations in China . . . . . . . . . . . . . . . . . . 92
7.4 Analysis of the Balance Sheet of Non-financial Corporations
in China and International Comparison . . . . . . . . . . . . . . . . . . 96
7.5 Conclusions and Policy Recommendations. . . . . . . . . . . . . . . . 100
Contents vii
8 Balance Sheet of the Household Sector . . . . . . . . . . . . . . . . . . . . . . 103
8.1 Updating Explanation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
8.2 Balance Sheet of Households in China for 2004–2014 . . . . . . . 104
8.3 Analysis of the Balance Sheet of Households in China
for 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
9 Financial Sector Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
9.1 BriefIntroductiontotheStatisticalSystemforChina’sCurrent
Financial Sector Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . 109
9.2 Preparation of Balance Sheet of the Financial Sector. . . . . . . . . 116
9.2.1 Converting the Sources & Uses of Credit Funds
of Financial Institutions in RMB into the Form
of Balance Sheet of Financial Institutions . . . . . . . . . . 116
9.2.2 Simplifying the Balance Sheet of Insurance
Companies and Securities Companies . . . . . . . . . . . . . 118
9.2.3 Consolidating the Simplified Balance Sheet
of Insurance Companies and the Simplified Balance
SheetofSecuritiesCompaniesintotheBalanceSheet
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . 124
9.2.4 China’s financial restructuring and growth mode
changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
9.3 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
10 The Central Bank Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . 135
10.1 The Basic Elements of the Central Bank Balance Sheet . . . . . . 135
10.2 Changes in Total Assets and Liabilities of China’s Central
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
10.3 Changes in the Central Bank’s Asset-Liability Structure . . . . . . 139
10.3.1 Foreign Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
10.3.2 Claims on Government. . . . . . . . . . . . . . . . . . . . . . . . 143
10.3.3 Claims on Depositary Financial Institutions . . . . . . . . . 145
10.3.4 Claims on Other Financial Corporations . . . . . . . . . . . 148
10.4 Changes in the Liability Structure of the Central Bank . . . . . . . 149
10.4.1 Reserve Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
10.4.2 Central Bank Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 153
10.4.3 Government Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 155
10.5 Changes in Net Claims of the Central Bank . . . . . . . . . . . . . . . 157
11 External Sector Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
11.1 Main Characteristics of China’s External Sector
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
11.1.1 Asset Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
11.1.2 Liability Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
viii Contents
11.2 International Comparison. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
11.2.1 Comparison of Total External Assets and Liabilities. . . 170
11.2.2 Structure Comparison . . . . . . . . . . . . . . . . . . . . . . . . . 171
11.2.3 Comparison of Investment Returns
on External Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
11.3 Potential Risks of the External Sector and Their
Prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
11.3.1 Maturity Mismatch Risk . . . . . . . . . . . . . . . . . . . . . . . 179
11.3.2 Currency Mismatch Risk . . . . . . . . . . . . . . . . . . . . . . 181
11.3.3 Capital Structure Mismatch Risk. . . . . . . . . . . . . . . . . 182
12 Implicit Pension Debts and Reform of the Old-Age Insurance
System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
12.1 Pension Funding Gap and Implicit Debt—Changes
and Causes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
12.1.1 ChangesinIncomesandExpendituresoftheOld-Age
Insurance in Recent Years and Comparison with the
Previous Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
12.1.2 Pension Funding Gap After Updating the Data and
Implicit Debt Estimates. . . . . . . . . . . . . . . . . . . . . . . . 187
12.2 Discussions and Suggestions on the Reform of the Old-Age
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
12.2.1 The Reforms Aiming toReduce the Pension Funding
Gap and Implicit Debt Reform Are Faced with
More Resistance and We Should Avoid “Benefits
Catching up and Surpassing” of the Old-Age
Insurance System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
12.2.2 EndowmentInsuranceforUrbanandRuralResidents
and Re-Discussion of Endowment Insurance Reform
in Government Institutions . . . . . . . . . . . . . . . . . . . . . 195
12.2.3 Postponement of Statutory Retirement Age and
Investment of Pension Fund into the Stock Market. . . . 199
12.2.4 Inter-regional Co-ordination of Old-Age Insurance. . . . 201
13 Creating the Chinese Version of “Municipal Bonds” . . . . . . . . . . . 205
13.1 Contrast and Thinking Behind the Numbers. . . . . . . . . . . . . . . 205
13.2 “Soft Constraints” and “Hard Constraints” . . . . . . . . . . . . . . . . 207
13.3 Restoring the Original True Nature of “Urban Construction
Investment Bonds” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
13.4 Regulation Over Municipal Bonds: Standards and
Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Contents ix
13.5 From a Class of Products to a Market . . . . . . . . . . . . . . . . . . . 212
13.6 Swap of Local Government Debts: Administrative
or Market-Oriented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
13.7 Fiscal and Tax Reforms: The Gap Between Reality
and Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Appendix A: An Explanation on the Main Preparation Methods
of This Book... ..... .... .... .... .... .... ..... .... 219
References.... .... .... .... ..... .... .... .... .... .... ..... .... 237
Postscript. .... .... .... .... ..... .... .... .... .... .... ..... .... 241
List of Figures
Fig. 1.1 Various stages of a leverage cycle.... .... .... .... ..... .. 14
Fig. 2.1 Size of total national assets: 2007–2013.... .... .... ..... .. 24
Fig. 2.2 Size of total national liabilities: 2007–2013..... .... ..... .. 24
Fig. 2.3 Size of net national assets: 2007–2013..... .... .... ..... .. 25
Fig. 2.4 Size of national non-financial assets: 2007–2013..... ..... .. 25
Fig. 2.5 Size of national financial assets: 2007–2013. ... .... ..... .. 26
Fig. 2.6 Size of net national financial assets: 2007–2013. .... ..... .. 26
Fig. 2.7 Structure of total national assets in 2013. .. .... .... ..... .. 27
Fig. 2.8 Structure of net national non-financial assets in 2013.. ..... .. 27
Fig. 2.9 Structure of national financial assets in 2013.... .... ..... .. 27
Fig. 2.10 Structure of total national liabilities in 2013..... .... ..... .. 28
Fig. 2.11 Structure of net national assets in 2013. ... .... .... ..... .. 28
Fig. 2.12 Structureofnetnationalfinancialassetsin2013.............. 28
Fig. 2.13 Changes in China’s debt to assets ratio: 2007–2013. . ..... .. 29
Fig. 3.1 Size and structure of China’s sovereign assets... .... ..... .. 33
Fig. 3.2 Size and structure of China’s sovereign debts. .. .... ..... .. 33
Fig. 3.3 China’s sovereign assets/liabilities and the government’s
net worth. . .... .... ..... .... .... .... .... .... ..... .. 34
Fig. 4.1 Changes in the leverage ratio of the household sector:
1996–2014..... .... ..... .... .... .... .... .... ..... .. 36
Fig. 4.2 Changes in the leverage ratio of the non-financial corporate
sector: 1996–2014. .. ..... .... .... .... .... .... ..... .. 37
Fig. 4.3 International comparison of non-financial corporate
debt to total debt ratios. ... .... .... .... .... .... ..... .. 39
Fig. 4.4 Changes in leverage ratio of the government sector:
1996–2014..... .... ..... .... .... .... .... .... ..... .. 40
Fig. 4.5 Changes in the leverage ratio offinancial institutions:
1996–2014..... .... ..... .... .... .... .... .... ..... .. 41
Fig. 4.6 Changes in the leverage ratio of the whole society:
1996–2014..... .... ..... .... .... .... .... .... ..... .. 42
xi