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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
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
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
0
500
1,000
1,500
2,000
2,500
0%
20%
40%
60%
80%
100%19
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
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Thou
sand
s
Shar
e to
tota
l
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
20
40
60
80
100
120
140
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
sand
s
Shar
e to
tota
l
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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