[Economic Daily]Liu Xiaoguang and Liu Yuanchun: Strengthen Hard Constraints and Optimize the Environment

In order to lay a solid foundation for preventing and defusing financial risks, deleverging is an inevitable choice for China's macroeconomic and financial policies. In general, the “stable leverage” in the total amount, the “lower leverage” in the structure, and the “optimal leverage” in the efficiency, through the formation of effective capital accumulation and R&D innovation through the safeguard leverage to make economy maintain high-speed growth for a long period of time may be the dominant choice for China's current implementation of the deleveraging strategy.

The focus of structural de-leverage is to promote the deleverage of state-owned enterprises.

Starting from China's national conditions, unlike mature market economies, some economic sectors have obvious soft budget constraints and rigid redemption problems, which makes the leverage ratio easy to accumulate and rise too fast, and at the same time lead to the quality of leverage utilization efficiency and formed assets deteriorated significantly. Especially since the international financial crisis, the leverage ratio of state-owned enterprises has risen rapidly, which is much higher than that of private enterprises in the same industry by 5 to 10 percentage points. It shows obvious characteristics of debt structure differentiation; China’s capital output ratio has increased significantly during the same period, reflecting the decline in investment efficiency. Therefore, the core of China's debt problem is not the aggregate problem but the structural issue, not the horizontal issue but the use of efficiency. The debt risk that China really faces is not from the overall debt level, but the mismatch of debt structure. It is not the liquidation risk of insolvency, but the risk that the asset quality and income will not be able to repay the debt on time. Therefore, the deleveraging operation of total amount control may not grasp the “bull nose” of the leverage ratio problem, and may even worsen the debt structure problem and exacerbate the risk behind the debt in the case of financial market distortion. To promote economic downturn, state-owned enterprises should be the focus.

In order to avoid the unclear positioning and inefficient implementation of the deleveraging policy, the central government proposed the idea of “structural de-leverage”. On April 2, the first meeting of the Central Financial and Economic Committee proposed “structural de-leverage” for the first time, pointing out that structural de-leverage should be the basic idea, and different requirements should be put forward by department and sub-debt type. Local governments and enterprises, especially state-owned enterprises should  lower the leverage as soon as possible and strive to achieve a stable and gradual decline in the macro leverage ratio. On July 31, the Political Bureau of the CPC Central Committee further proposed that it is better to combine prevention and mitigation of financial risks with the service of the real economy. Effectively promoting the leverage of state-owned enterprises is the premise and basis for achieving this goal.

The key to promoting the deleverage of state-owned enterprises is to strengthen the constraints on balance of assets and liabilities of state-owned enterprises.

The key to promoting the deleverage of state-owned enterprises is to strengthen the constraints on balance of assets and liabilities of state-owned enterprises and clarify the relationship among the government, banks and state-owned enterprises. In the current reform period, the reason for not being able to simply de-leverage and structural adjustment in the easing policy condition is that if the asset-liability constraints of state-owned enterprises cannot be effectively established, China's loose monetary policy will not have a good market and institutional support system. Under the soft budget constraint mechanism, state-owned enterprises and local governments only consider borrowing without considering repayment, which leads to a faster growth of debt in a loose environment. The result is not deleverage but leverage. In the next step, it is necessary to carry out the "hard-binding" mechanism of state-owned enterprises and deepen the reform of the market system while tightening policies.

The core of market system reform is to eliminate various "soft constraints", especially the soft constraints between the government and state-owned enterprises, banks and state-owned enterprises. Therefore, using state-owned enterprises to deleverage and market-oriented reforms to reconstruct the behavioral model of state-owned enterprises, using the regulatory system and financial system reform to rebuild the bank's behavior patterns, and using the government administrative system reform to reconstruct the government's power boundaries and government behavior patterns is to the key to the “regulatory cycle” in the past. Only when the boundary of interest changes, the behavior pattern of the micro-subject will change. Only when the behavior pattern of the micro-subject changes, the way and efficiency of resource allocation will change. Only when the way and efficiency of resource allocation change, de-leverage can truly achieve the purpose of preventing and defusing financial risks and promoting stable growth in the medium and long term.

Strengthening the constraints on balance of assets and liabilities of state-owned enterprises should cooperate with a good macro policy environment.

In view of the current situation, it is imperative to take the leverage of non-financial enterprise departments as the core and de-leverage of state-owned enterprises as the top priority. It is more important to introduce effective implementation measures to promote the deleverage of state-owned enterprises as soon as possible. It is even more important to fundamentally strengthen the hard constraints on assets and liabilities of state-owned enterprises. For "zombie enterprises", we must resolutely break local resistance and soft budget constraints, and achieve market clearing through bankruptcy. At the same time, we must further rationalize the relationship between local governments and state-owned enterprises, and prevent local governments from using the state-owned enterprise platform to make debt invisible and leverage.

From a macro perspective, a prudent monetary policy remains neutral, which will create a stable monetary environment for the optimization of leveraged structures such as deleveraging state-owned enterprises. By accelerating the construction of multi-level capital markets, we will effectively increase the proportion of direct financing and provide new channels for corporate financing. At the same time, we must face up to the financial risks that may be hidden in the actual economic operation, strengthen the macro-prudential management and systemic risk prevention duties of the People's Bank of China, fill in the shortcomings of supervision, and effectively prevent funds from circulating within the financial system and overfast expanding of shadow banks by using regulatory arbitrage. It is necessary to enhance the expected management ability, adjust the expectation of the linkage between the basic financial asset price, interest rate and exchange rate, and then regulate the investment and financing behavior of the whole society.

According to the current macroeconomic situation and the monetary and financial environment, it is recommended to adopt a policy combination of “hard constraints on state-owned enterprise debt – tight macro-prudential management – loose monetary policy”, and use “optimizing the credit structure – revitalizing the stock of assets – stimulating consumer demand”. The combined reform measures will gradually resolve China’s high debt ratio. At the same time, we should actively take various measures to ensure the reasonable financing needs of high-quality private enterprises, innovative ability and growth-oriented SMEs, and avoid worsening the contradiction between the delay of corporate debt maturity and the bank's reluctance to lend loans and loan less under the strong supervision mode to step into liquidity dilemma.