Chinese People's Bank Governor Signals "Debt Ratio Flattening" and Debt Reduction Next Year

Debt Management and Monetary Policy Normalization to Be Pursued as Economy Fully Recovers

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Yi Gang, Governor of the People's Bank of China, emphasized the necessity of 'monetary policy normalization' and signaled to the market that the deleveraging policy could be fully resumed starting next year.

According to Chinese media such as Caixin on the 22nd, Governor Yi stated in a speech at the 'Financial Forum' held in Beijing the previous day, "During the special period of combating the epidemic, our debt ratio has risen somewhat," adding, "After the GDP growth rate accelerates next year, the debt ratio can stabilize further."

He continued, "It is necessary to properly control and manage the total sluice gate in monetary policy," emphasizing, "We must smooth out fluctuations in the debt ratio and maintain long-term stability within a stable trajectory."

Governor Yi's remarks are interpreted as the People's Bank of China intending to actively manage the debt ratio again from next year, when the economy is expected to return to a normal track.

China's quarterly economic growth rate fell to a worst negative 6.8% since the first quarter statistics during the most severe period of the COVID-19 pandemic, then rose to 3.2% in the second quarter and 4.9% in the third quarter, forming a clear V-shaped curve.

[Image source=Yonhap News]

The International Monetary Fund (IMF) recently projected in its World Economic Outlook report that China's economic growth rate will be 1.9% this year, the only positive growth among major economies worldwide.

The IMF also forecasted that China's economic growth rate will reach 8.2% next year, fully recovering from the impact of COVID-19.

Chinese leadership, including President Xi Jinping, has viewed the debt issue as a serious risk to the Chinese economy in the future and has implemented stringent deleveraging policies.

However, faced with the unprecedented major shock of COVID-19 this year, they temporarily tolerated a rise in the debt ratio and deployed comprehensive fiscal and monetary stimulus measures, including raising the fiscal deficit ratio, expanding government bond issuance, and lowering reserve requirement ratios and policy interest rates.

According to the government think tank, the Chinese Academy of Social Sciences, and the National Finance and Development Laboratory, as of the end of last year, China's total debt ratio, including government, non-financial corporations, and households, was 245.4%, up 6.1 percentage points from the end of the previous year.

Experts predict that due to the impact of stimulus measures, China's total debt ratio could surge by up to 10 percentage points this year.

In fact, according to the latest statistics from the People's Bank of China, the increase in social financing, which includes bank loans and corporate bond issuance from the first to third quarters of this year, reached 29.62 trillion yuan (approximately 5,000 trillion Korean won), 9 trillion yuan more than the same period last year.

However, Governor Yi also conveyed a message that the monetary policy stance will not be abruptly tightened.

He stated, "We must strike a good balance between stable growth and risk prevention," adding, "We need to implement a normal monetary policy as much as possible in the long term, ensuring that the market is neither short of money nor flooded with it."