Debt at stable level in Q2 as macro leverage ratio growth falls sharply

China's debt level stabilized in the second quarter, leaving more room for fiscal policies to boost economic growth in the remaining months of this year, according to research from a national think tank on Tuesday.

The country's macro leverage ratio－the percentage of debt in the government, household and corporate sectors to total GDP－increased by 0.7 percentage point in the second quarter to 249.5 percent, down from the 5.1 percentage growth in the first three months, according to a report from the National Institution for Finance and Development, a government-backed financial think tank.

"The fast expansion of the macro leverage ratio has been constrained, and the overall debt level was stabilized," it said.

For the second half of this year, in the face of the economic growth pressure, "stabilizing economic growth should be prior to deleveraging", said Li Yang, head of the institution.

Economists expect policymakers to add the quota of special local government bonds－a type of bond used mainly for infrastructure construction financing, starting from the fourth quarter. That will be the most effective measure to keep the whole year's GDP growth rate above 6 percent, amid increasing external headwinds, they said.

"It is possible that the quota will increase by 1 trillion yuan ($141 billion), after the 2.15 trillion yuan special bond quota is used up by September," said Robin Xing, Morgan Stanley's chief economist in China.

But a senior official at the Financial Department of the Ministry of Finance told China Daily earlier: "It is unlikely that the government will raise the quota for local government bonds, or for the special bonds, within this year."

There is room for the central government to issue treasury bonds in the following months to support economic growth, while the policy will remain tight on controlling new "hidden" local government debt, said Chang Xin, a professor of the Department of Macroeconomics of the Chinese Academy of Social Sciences.

Through issuing the special bond, local governments can increase investment, as a major part of their fiscal spending, Chang added.

The report disclosed that so far this year, local governments have been continually reducing their contingent liabilities, the so-called hidden debt off the balance sheet. Measures include debt swap programs and non-standard loans, to lower the financing costs and rollover debt.

The leverage ratio of local governments stood at 22 percent by June, compared with 20.4 percent at the end of 2018, showed the report.

The debt burden of State-owned enterprises remained stable in the second quarter, indicated by a leverage ratio of 64.5 percent by June, down from 64.7 percent by the end of 2018, it said.

Local government debt in China plays a major role in directing and executing public investment, which has been a key driver of China's economic expansion, and is again growing in importance as the authorities seek to counteract slowing growth, said Gene Fang, associate managing director of the Sovereign Risk Group, Moody's Investors Service Singapore Ltd.

"Despite increased bond issuance quotas, local government debt continues to rely on local government financing vehicles－in effect specialized local government-owned and State-owned enterprises－to fund a significant portion of their infrastructure investment," said Fang.