The High Leverage Ratio in China: Risks and Opportunities

Shang-Jin WeiColumbia University and NBER

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Gross Debt/GDP, China, 1996-2015

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Total

Corporate

Government

Household Financialsector

But structural aspects need to be taken into account

• Asset/GDP is rising too– Based on annual survey of above-scale industrial firms:

1995 2005 2015Debt/asset ratio 66% 60% 56%

• Divergence between private sector firms and state-owned firms

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SOEs, 90th percentile

Private firms, 90th percentile

SOEs, median

Private firms, median

First point• Opportunity

– De-leveraging and SOE reforms could be pursued in a complementary manner, with low risk for a financial crisis

• Policy risk– Reluctance to let go of the SOEs– Evergreening the loans to SOEs

• Worsening the overall leverage problem

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• Second point

• In the medium term, whether the debt/GDP ratio will improve or develop into a crisis also depends on whether GDP can grow at a healthy rate.

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Growth rate of GDP and TFP

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

1979

1980

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GDP TFP

Let capital share=0.5

• Can the growth model transition from “made in China” to “innovated in China”?

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If you want to look reasons to say no, you can find them

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If you wish to look for optimistic examples, you can find them too.

WeChat’s world

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R&D/GDP vs GDP per capita

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Note: data for China are from 1995to 2014, and data for all other countries are for 2014 or the latest year available. Source: OECD database and World Bank.

Number of Chinese patents has exploded

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500

1,000

1,500

2,000

2,500

0%

20%

40%

60%

80%

100%19

9519

9619

9719

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9920

0020

0120

0220

0320

0420

0520

0620

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0820

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1120

1220

1320

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Thou

sand

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Chinese patent applications

Invention (%) Utility model (%)Design (%) Total domestic applications (RHS)

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Invention patents in the US show a rising trend

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Invention Patents Granted in USPTO by Different Countries

Growing patent citations indicate quality improvements

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Citations on Invention Patents Granted by USPTO: Cross-country Comparison

But evidence of resource mis-allocation:SOEs are granted more subsidies

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Ratio of Subsidies to Sales by Firm Ownership and Size

…but lag behind private firms in patent generation, and less efficient in converting R&D’s to patents

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0

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160

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Thou

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Shar

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Domestically granted patents

Private firms (%) State-owned firms (%) Foreign firms (%) Total (RHS)

Summary• The rising debt/GDP takes place together with rising

asset/GDP• Divergent patterns in leverage between SOEs and

private sector firms also imply an opportunity to pursue SOE reforms and deleveraging in a complementary way

• Future GDP growth is important for keeping the leverage ratio manageable

• Future growth depends on innovation and productivity growth

• Chinese firms can innovate but resource misallocation needs to be addressed

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