(Yicai Global) May 12 -- China’s household leverage ratio fell to 62.1 percent at the end of the first quarter from 62.2 percent at the end of the previous quarter, according to a research report published by a government think tank.

The first quarterly decline since 2012 was driven by higher economic growth, a narrow increase in debts and seasonal factors, the report from the National Institution for Finance and Development under the Chinese Academy of Social Sciences showed.

In addition, China’s macro leverage ratio fell to 268 percent at the end of the first quarter, down 2.1 percentage points from 270.1 percent at the end of last year, it said.

“Though the residents’ leverage ratio fell, the decline was only slight,” Liu Lei, secretary-general of the NIFD’s national balance sheet research center, told Yicai Global. “The growth rate in residents’ liabilities was relatively high.”

“In recent years Chinese residents’ leverage ratio has been improving to the average level of developed nations from that of developing countries,” the report added.

The leverage ratios of non-financial companies and governmental departments both declined to varying degrees during the reporting period, per the report.

The leverage rate of government departments fell 1.1 percentage point to 44.5 percent at the end of the first quarter from 45.6 percent at the end of 2020, the largest decline, while that of non-financial firms also dipped 0.9 percentage point.

Seasonal Factors

However, the report attributes the decline in leverage ratio at all levels of government in part to seasonal factors, noting that the first quarter is usually the period when governments see sharp falls in leverage ratios.

“The decline in macro leverage ratio in the first quarter was mainly influenced by higher economic growth, while debt growth also narrowed,” Liu noted.

Liu predicted that China will likely achieve annual de-leveraging this year, with the macro leverage ratio expected to fall by around 3 percentage points. The difference between the full-year debt growth rate and the nominal gross domestic product growth ratio will be about 1 percentage point, he added.

On the other hand, the report also showed that the local debts of nine Chinese provinces now exceed 40 percent of their respective local gross domestic product.

Five of the provinces with the largest local debts are located in the country’s relatively underdeveloped western region, Liu told Yicai Global. And the room for these provincial governments to continuously add new debt is getting smaller and smaller, as such they will face a serious debt burden in future.

Therefore, Liu believes that although the current pressure on local governments over debt repayment is not huge, they still need to pay attention to relevant risks, such as hidden government liabilities and the imbalance in debt pressure between different regions.

Editors: Tang Shihua, Peter Thomas