(Yicai Global) July 5 -- The growth of China's financial leverage ratio is slowing, which shows that the world's second-largest economy's supply-side reform has yielded substantial results, a top economist from the central bank says.

The debt-to-equity ratio's growth rate was 1.1 percentage points lower in the first quarter of this year than last year, Liu Shijin, member of a monetary policy group at the People's Bank of China, said in an interview with state media Economic Daily. The ratio was still 0.9 percentage points higher than last year. The ratio speaks for companies' ability to pay for their liabilities. 

Liu expects that China's overall leverage ratio will stabilize and gradually decline in the future as factors that are pushing up the ratio are undergoing important changes.

Liu gave five main factors which suggest that companies will take less debt. First, China is shifting from high-speed growth to high-quality development. Secondly, both the urbanization and monetization processes will slow down as China's population is aging. 

Moreover, factors that led to rising leverage such as shadow banking are undergoing significant changes due to increased regulation. This also goes for local governments' ability to take on more debt. Finally, corporate profitability and sustainability will improve due to the government's campaign to reduce overcapacity, which will narrow the gap between supply and demand, Liu concluded.

Chinese regulators will pay more attention to structural approaches to reduce leverage while avoiding the overuse of across-the-board deleveraging measures, said Ma Jun, Liu's fellow member at the group assigned by PBOC. 

The leverage ratio was 2.4 percentage points higher last year than in 2016.

Editor: Emmi Laine