The growth of China's macro leverage ratio further slowed down in the first half of 2018, with the increase in the first quarter down by 1.1 percentage points year on year. Meanwhile, the leverage structure is also optimizing.

Compared with 2017, the leverage ratio of local governments experienced a downward trend at the end of the first quarter, and the total government leverage ratio saw a decline of 0.7 percentage points.

The leverage ratio grew by 0.6 percentage points in non-financial enterprises, and the household sector witnessed a marginal slowdown in its growth, increasing by 1.0 percentage point.

Supply-side structural reform and targeted macro policies are the major power to stabilize the leverage ratio. With supply-side structural reform further deepened, both enterprises’ profits and fiscal revenue saw rapid growth in the first half year, which is beneficial to the dissolution of existing debts.

Thanks to the implementation of the stable neutral monetary policy, M2, a broad measure of money supply that covers cash in circulation and all deposits, grew 8 percent year on year by the end of June. The growth rate was 1.1 percentage points lower than the rise registered at the same period of last year, creating a favorable monetary and financial environment to stabilize the leverage.

With further standardization of the financing guaranty of local governments, the debt growth of soft constraints bodies such as local platform companies has obviously decelerated.

The future stabilization and decrease of leverage ratio call for synergic implementation of related macro policies. The country should enhance efforts to improve total factor productivity, build a modern economic system, lay importance on indicators such as efficiency, quality, profitability and sustainability, and drive up power for endogenous growth, so as to realize high economic growth without the push from the leverage.

In addition, China should keep deepening supply-side structural reform and clearing out zombie enterprises to eliminate ineffective supplies and reduce invalid fund occupation. China should also strengthen budget constraints for local governments, especially clear and reorganize implicit debts, to get debts of local governments back to a reasonable level.

Besides, the country should improve both monetary policy and macro-prudential management, grasp a good control of money supply, and maintain a reasonable growth of money and credit. By enhancing financial monitoring and guiding financial behaviors, the country will improve the financial market and well manage shadow banking.

The country should perfect its mechanism and enlarge the group of investors, develop a multi-layer capital market and improve the ratio of direct financing in a stable manner. It should promote the marketization of debt-to-equity swap, accelerate mixed-ownership reform, and lower the leverage of large stated-owned enterprises.

Lastly, the country should advance debt restructuring of enterprises, encourage market-oriented mergers and acquisitions, and improve debt conditions of enterprises.

Multiple profound and long-term reasons attributed to the high leverage ratio of China, and it’s not practical to solve the problem at one stroke and bring back the ratio to a reasonable level quickly.

Under such circumstance, China must follow the arrangement of the central leadership, keep the periodical goal of stabilizing the leverage, develop simultaneously the macro and targeted policies, and strengthen policy coordination. From a long-term perspective, the goal of deleveraging will finally be achieved.

(Lian Ping is chief economist of the Bank of Communications)