Chinas national balance sheet (2015) leverage adjustment and risk management

Yang Li Xiaojing Zhang Xin Chang China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management Yang Li Xiaojing Zhang Xin Chang • China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management 123 Yang Li National Finance and Development Laboratory Beijing China Xin Chang Institute of Economics, CASS Beijing China Xiaojing Zhang National Finance and Development Laboratory Beijing China Translated by Fu Yili Sponsored by Chinese Fund for the Humanities and Social Sciences ISBN 978-981-10-7732-6 ISBN 978-981-10-7733-3 https://doi.org/10.1007/978-981-10-7733-3 (eBook) Jointly published with China Social Sciences Press, Beijing, China The print edition is not for sale in China Mainland Customers from China Mainland please order the print book from: China Social Sciences Press Library of Congress Control Number: 2017964242 © China Social Sciences Press and Springer Nature Singapore Pte Ltd 2018 This work is subject to copyright All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publishers, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publishers remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer Nature Singapore Pte Ltd The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Contents Part I General Report 4 11 11 12 13 15 16 19 National Balance Sheet 21 Sovereign Balance Sheet 31 Whole Society Leverage Ratio 4.1 Leverage Ratio of All Sectors 4.2 Leverage Ratio of the Whole Society 35 35 42 Main Report: Leverage and Risk Management 1.1 Major Findings 1.1.1 National Balance Sheet 1.1.2 Sovereign Balance Sheet 1.1.3 Balance Sheets of All Sectors 1.2 Leverage Adjustment and Risk Management 1.2.1 Description of the Aggregation Method 1.2.2 Whole Society Leverage Ratio 1.2.3 Leverage Cycle 1.2.4 Dilemma Between Deleveraging and Ensuring Steady Growth: Molecular Countermeasure and Denominator Countermeasure 1.2.5 Leverage Adjustment and Financial Risk Management 1.2.6 The Fundamental Way Out Is to Change the Mode of Economic Development Through Reform Part II Sectoral Analysis Local Government Balance Sheet 5.1 Preparation of Local Government Balance Sheet 5.1.1 Estimation of asset items 47 47 49 v vi Contents 5.1.2 5.1.3 5.2 5.3 Estimation of liability items Some additional explanations on estimation of local assets and liabilities Analysis and Assessment of Local Government Debt Risk 5.2.1 First, the Debt Growth Rate Is Still High 5.2.2 Second, the Financing Structure Tends to be More Complicated 5.2.3 Third, the Liquidity Risk Due to Debt Maturity in a Concentrated Time Period Should Not Be Ignored 5.2.4 Fourth, Regional and Sectoral Risks Should Arouse Our Attention 5.2.5 Fifth, the Existing Debt Repayment Base Is Somewhat Unsustainable 5.2.6 Sixth, the Risk Exposure to Contingent Liabilities Is Widening Discussion on Some Issues Concerning Local Debts 5.3.1 First, Establishing and Promoting a New Local Financing Framework and PPP Model 5.3.2 Second, Local Debt Swap and Its Impact 5.3.3 Third, Further Improving the Degree of Marketization of Local Debt Analysis of Central Government Balance Sheet 6.1 The Balance Sheet of the Chinese Government Prepared by the PBC 6.2 General Central Government Balance Sheet 6.3 The Central Government Balance Sheet as Part of the National Balance Sheet 52 56 59 60 61 61 63 64 66 67 67 71 74 77 77 79 84 Balance Sheet of the Non-financial Corporation Sector 7.1 Introduction 7.2 Basic Principles for Indirect Estimation of the Balance Sheet of Non-financial Corporations 7.3 Indirect Estimation of Total Assets and Liabilities of Non-financial Corporations in China 7.4 Analysis of the Balance Sheet of Non-financial Corporations in China and International Comparison 7.5 Conclusions and Policy Recommendations 87 87 90 92 96 100 Contents vii Balance Sheet of the Household Sector 8.1 Updating Explanation 8.2 Balance Sheet of Households in China for 2004–2014 8.3 Analysis of the Balance Sheet of Households in China for 2012 103 103 104 104 Financial Sector Balance Sheet 9.1 Brief Introduction to the Statistical System for China’s Current Financial Sector Balance Sheet 9.2 Preparation of Balance Sheet of the Financial Sector 9.2.1 Converting the Sources & Uses of Credit Funds of Financial Institutions in RMB into the Form of Balance Sheet of Financial Institutions 9.2.2 Simplifying the Balance Sheet of Insurance Companies and Securities Companies 9.2.3 Consolidating the Simplified Balance Sheet of Insurance Companies and the Simplified Balance Sheet of Securities Companies into the Balance Sheet of Financial Institutions 9.2.4 China’s financial restructuring and growth mode changes 9.3 Conclusion 10 The Central Bank Balance Sheet 10.1 The Basic Elements of the Central Bank Balance Sheet 10.2 Changes in Total Assets and Liabilities of China’s Central Bank 10.3 Changes in the Central Bank’s Asset-Liability Structure 10.3.1 Foreign Assets 10.3.2 Claims on Government 10.3.3 Claims on Depositary Financial Institutions 10.3.4 Claims on Other Financial Corporations 10.4 Changes in the Liability Structure of the Central Bank 10.4.1 Reserve Money 10.4.2 Central Bank Bonds 10.4.3 Government Deposits 10.5 Changes in Net Claims of the Central Bank 11 External Sector Balance Sheet 11.1 Main Characteristics of China’s External Sector Balance Sheet 11.1.1 Asset Structure 11.1.2 Liability Structure 109 109 116 116 118 124 126 134 135 135 136 139 139 143 145 148 149 149 153 155 157 161 163 163 167 viii Contents 11.2 International Comparison 11.2.1 Comparison of Total External Assets and Liabilities 11.2.2 Structure Comparison 11.2.3 Comparison of Investment Returns on External Assets 11.3 Potential Risks of the External Sector and Their Prevention 11.3.1 Maturity Mismatch Risk 11.3.2 Currency Mismatch Risk 11.3.3 Capital Structure Mismatch Risk 12 Implicit Pension Debts and Reform of the Old-Age Insurance System 12.1 Pension Funding Gap and Implicit Debt—Changes and Causes 12.1.1 Changes in Incomes and Expenditures of the Old-Age Insurance in Recent Years and Comparison with the Previous Estimates 12.1.2 Pension Funding Gap After Updating the Data and Implicit Debt Estimates 12.2 Discussions and Suggestions on the Reform of the Old-Age Insurance 12.2.1 The Reforms Aiming to Reduce the Pension Funding Gap and Implicit Debt Reform Are Faced with More Resistance and We Should Avoid “Benefits Catching up and Surpassing” of the Old-Age Insurance System 12.2.2 Endowment Insurance for Urban and Rural Residents and Re-Discussion of Endowment Insurance Reform in Government Institutions 12.2.3 Postponement of Statutory Retirement Age and Investment of Pension Fund into the Stock Market 12.2.4 Inter-regional Co-ordination of Old-Age Insurance 13 Creating the Chinese Version of “Municipal Bonds” 13.1 Contrast and Thinking Behind the Numbers 13.2 “Soft Constraints” and “Hard Constraints” 13.3 Restoring the Original True Nature of “Urban Construction Investment Bonds” 13.4 Regulation Over Municipal Bonds: Standards and Classification 170 170 171 176 179 179 181 182 183 183 183 187 192 193 195 199 201 205 205 207 208 210 Contents ix 13.5 From a Class of Products to a Market 212 13.6 Swap of Local Government Debts: Administrative or Market-Oriented 215 13.7 Fiscal and Tax Reforms: The Gap Between Reality and Target 217 Appendix A: An Explanation on the Main Preparation Methods of This Book 219 References 237 Postscript 241 List of Figures Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig Fig 1.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 3.1 3.2 3.3 Fig 4.1 Fig 4.2 Fig 4.3 Fig 4.4 Fig 4.5 Fig 4.6 Various stages of a leverage cycle Size of total national assets: 2007–2013 Size of total national liabilities: 2007–2013 Size of net national assets: 2007–2013 Size of national non-financial assets: 2007–2013 Size of national financial assets: 2007–2013 Size of net national financial assets: 2007–2013 Structure of total national assets in 2013 Structure of net national non-financial assets in 2013 Structure of national financial assets in 2013 Structure of total national liabilities in 2013 Structure of net national assets in 2013 Structure of net national financial assets in 2013 Changes in China’s debt to assets ratio: 2007–2013 Size and structure of China’s sovereign assets Size and structure of China’s sovereign debts China’s sovereign assets/liabilities and the government’s net worth Changes in the leverage ratio of the household sector: 1996–2014 Changes in the leverage ratio of the non-financial corporate sector: 1996–2014 International comparison of non-financial corporate debt to total debt ratios Changes in leverage ratio of the government sector: 1996–2014 Changes in the leverage ratio of financial institutions: 1996–2014 Changes in the leverage ratio of the whole society: 1996–2014 14 24 24 25 25 26 26 27 27 27 28 28 28 29 33 33 34 36 37 39 40 41 42 xi 226 Appendix A: An Explanation on the Main Preparation Methods of This Book and Sino-foreign joint ventures; the data for 2006–2013 is the total external debt owed by the relevant ministries and commissions under the State Council, Sino-foreign joint venture banks and foreign-Sino joint venture enterprises In 2014, the State Administration of Foreign Exchange released the data on external debt denominated in foreign currencies in accordance with the IMF’s SDDS and no longer released the data by the types of debtors such as ministries and commissions under the State Council, Chinese and foreign banks and Chinese and foreign enterprises We have calculated the proportion of the external debt borrowed by the above debtors to the proportion of total external debt using the method of historic averages and then multiply it by the outstanding external debt that year to get the data for 2014 Finally, we have then converted the data in US dollars to the data in RMB according to the average RMB exchange rate of all the years “Quasi-government Bonds” Quasi-government bonds refer to the covered bonds issued by the government departments and policy institutions Here we have mainly studied the financial bonds issued by policy banks We believe that although bond issuance by policy banks is a market behavior (the size and pricing of bonds issued by them are determined based on their own credit worthiness, and the funds raised are also for market-oriented use), it relies on the state’s credit Therefore, if risk control is inadequate or any loss or devaluates occurs due to domestic and international economic and financial shocks, this portion of debts may ultimately be translated into sovereign debts, so these debts should be regarded the contingent liabilities of the public sector The data are from CEIC and the statistics of China’s bond market Local Government Debts The data for 2011–2014 have combined the data of the National Audit Office, CBRC, Weekly Statistics on China’s Bond Market and China Trustee Association; the data for 2010 have combined the data of the National Audit Office and CBRC; the data for 2000–2009 were projected based on the changes in the growth rate of outstanding local government debt in the Results of National Audit of Local Government Debts issued by the National Audit Office in June 2011 Debts of State-Owned Enterprises Theoretically, state-owned enterprises are corporate and market entities that enjoy full management authority and assume sole responsibility for their profits and losses, so they should take on their own debts However, from the perspective of investors, there is an inseparable link between the government and state-owned enterprises From a legal perspective, when state-owned enterprises are unable to repay their debts, the governments have to take the responsibility for repaying their debts according to their contribution proportion Furthermore, from the perspective of social stability, the government will also provide a bailout to state-owned enterprises and assume the role of the final payer Therefore, we can reasonably regard the debt of state-owned enterprises as contingent government debt Appendix A: An Explanation on the Main Preparation Methods of This Book 227 The data in this section are from Finance Yearbook of China for the relevant years (the data for 2014 were estimated by the trend extrapolation method) It should be noted that local state-owned enterprises to a large extent include the local government financing platforms as government-backed entities Therefore, in consolidating the statements, we made the necessary adjustments to prevent overlapping 10 Contingent Liabilities Existing as Financial Non-performing Assets or Their Transformation Forms First, the non-performing assets of banks The sources and calculation methods for the data for all the years are as follows: the data for 2000 and 2001 are the non-performing assets of the four state-owned commercial banks, the data for 2000 were obtained by adding up the non-performing assets of the annual statements of the banks (where ABC’s non-performing asset ratio is not reflected in the annual statements, so it was calculated based on the change range of non-performing asset ratio during 2006–2000); the data for 2001 were calculated based on the relevant data in the Monetary Policy Implementation Report in 2002 issued by the People’s Bank of China and the report on the work of CBRC for the first half of 2003; the data for 2002 and 2003 are the non-performing assets of major banking financial institutions, including state-owned commercial banks, policy banks and joint-stock commercial banks; the data for 2004 are the non-performing assets of the major commercial banks, including state-owned commercial banks and joint-stock commercial banks; the data for 2005–2014 are the non-performing assets of commercial banks, including state-owned commercial banks, joint-stock commercial banks, urban commercial banks, rural commercial banks and foreign banks; the data for 2002–2014 are from CBRC Second, the contingent liabilities arising from the disposal of the banks’ non-performing assets Banks can dispose non-performing assets in many ways, including stripping and writing-off non-performing assets, capital injection, issuing special government bonds, central bank bills and re-lending and attracting financial investors But no matter how non-performing assets are disposed, they have just changed in form and have by no means disappeared (for example, the nonperforming assets of commercial banks have been changed into the non-performing subloans of the central bank) Therefore, a part of the non-performing assets of banks still exist as sovereign liabilities, and the other part are converted into other forms of contingent liabilities For the contingent liabilities arising from the disposal of the banks’ non-performing assets, there are roughly several periods: the data for 2000–2003 reflect the acceptance of stripped non-performing assets of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and China Development Bank through issuing bonds by the four asset management companies and re-lending by the People’ Bank of China in the late 1990s The data for 2004 mainly reflect the commercial stripping of doubtful and loss loans of Bank of China, China Construction Bank and Bank of Communications as well as the writeoff of loss assets of Bank of China and China 228 Appendix A: An Explanation on the Main Preparation Methods of This Book Construction Bank They also include a part of the non-performing assets of Bank of China and China Construction Bank equally swapped by the People’s Bank of China by means of bank bill The data for 2005–2007 reflect the commercial stripping of non-performing assets of Industrial and Commercial Bank of China and Bank of Shanghai, central bank bills and re-lending of rural credit cooperatives as well as asset losses of re-lending of the central bank The data for 2008–2014 reflect the non-performing assets (including doubtful loans, loss loans and non-credit assets) stripped through equal swap by interest-free re-lending of the People's Bank of China and the “condominium fund” jointly established by the Agricultural Bank of China and the Ministry of Finance 11 Social Security’s Funding Gap Mainly Including Implicit Pension Debt It specially refers to the implicit pension debt burden left over from the transition from the old pension system to the new system (so here it is the estimation based on narrow scope) This research group has specially estimated the implicit pension debt over the years arising from the transition of the pension system (for details, refer to Party of China’s National Balance Sheet 2013 and Chapter 12 of this book) The data for 2000–2014 are all from this research group’s estimates of narrow-scope outstanding implicit pension debts for all the years (retaining the transition costs) A.3 Preparation Method for the National Balance Sheet There are two basic methods to prepare a balance sheet: direct and indirect methods (the Department of National Accounts of NBS 2003) The greatest difference between the two methods is that: the direct method requires independent accounting for each year’s data, while the indirect method is to extrapolate the data of other years using the data of flow of funds accounting and other economic accounting on the basis of the data of the base year prepared by the direct method The theory of the direct method is simple and intuitive, but involves hefty workload The indirect method involves small workload, but it is technologically complicated If an accurate and detailed national balance sheet can be prepared on the government side by the direct method each year, then the indirect method which focuses on estimation will have relatively limited significance and can only be used for confirmation and verification However, although the NBS started trial complication in 1996 and has compiled the national balance sheet for 1995 to a recent year (the Department of National Accounts of NBS 2003, p 108), the national balance sheet has not been published so far This shows that the compilation work on the government side may still face some difficulties The theory for the estimation by Ma Jun et al (2012) and Wang Jia (2013) should be regarded as the direct method, but some relatively rigid and subjective assumptions were introduced due to the lack of a full range of data, thus affecting the objectiveness and accuracy of the results For example, as the detailed balance sheet data of the listed Appendix A: An Explanation on the Main Preparation Methods of This Book 229 companies are available, the overall asset-liability structure of non-financial corporations is assumed to be the same as that of non-financial listed companies, which has clearly disregarded the application and analytical value of the balance sheet itself There are great differences between asset-liability structures of listed companies and unlisted companies, the results of structural analysis of the balance sheets that have been compiled in this way obviously can only present the situation of the listed companies rather than the overall situation of non-financial corporations Theoretically, the balance sheet is an important part of the national economic accounting system and a useful complement and natural extension of accounting of current account and accumulation account Therefore, deriving the data on assets and liabilities from the flow of funds accounts and other data should be an indispensable part of national economic accounting Another realistic factor supporting the indirect method is China’s economic census system China conducted three economic censuses in 2004, 2008 and 2013, and the relevant data have all been published The economic censuses, which have consumed enormous man power and material resources, undoubtedly provide the best support for the direct method The national balance sheet for the year when the economic census was conducted can be prepared directly using the data of the census, and the balance sheets for other years may be prepared using the indirect method In the indirect method, the year when the economic census was conducted is the base year, and the flow of funds accounts and other data provide the main flow information In short, the compilation of national balance sheet using the indirect method will undoubtedly have a greater space in China SNA 2008 elaborately and clearly describes the tripartite relationship among the national income and production accounting, the flow of funds accounts and the balance sheet First, the SNA system consists of two parts: a sequence of interconnected flow accounts linked to different types of economic activity taking place within a given period of time, together with balance sheets that record the values of the stocks of assets and liabilities held by institutional units or sectors at the beginning and end of the period Second, the entire sequence of accounts is divided into three categories: current accounts, accumulation accounts and balance sheets Accumulation accounts cover changes in assets and liabilities and changes in net worth There are four accumulation accounts: the capital account, the financial account, the other change in the volume of assets account and the revaluation account, showing all the changes in the two assets and liabilities accounts Finally, the balance sheets show the values of the stocks of assets and liabilities and net worth The other change in the volume of assets account summarizes the contents of accumulation accounts That is, in the account, the entry of each asset or liability is equal to the sum of the entry of the asset or liability in the four accumulation accounts This is because all changes affecting the assets or liabilities held by an institutional unit and sector in a period of time are systematically recorded in this or that flow account Obviously, if the relevant statistics can be carried out strictly in accordance with the design of SNA 2008, national production and income accounts, flow of 230 Appendix A: An Explanation on the Main Preparation Methods of This Book accounts and national balance sheets will be fully consistent, and stocks and flows, entities and finance will also be balanced in the relevant accounts However, what the SNA provides are theoreticized ideal circumstances and will face many difficulties in real operations For example, theoretically, the net borrowing or net lending calculated by capital accounts and financial accounts should be equal In practice, however, to realize such constant equal relation is one of the toughest tasks encountered in the preparation of national accounts Another example is that the revaluation of stock assets is also a thorny issue, many market transactions where assets are not active need to be estimated with many indirect methods In the theoretical principles of SNA, the value of stock of an asset in the balance sheet at the beginning and end of the period satises the following formula: At ỵ ẳ At ỵ GAt ỵ QAt ỵ RAt In the formula, At and At ỵ are the value of stock assets in the balance sheet at the beginning and end of the period respectively; GAt is the total value of the assets acquired through transactions during the accounting period, less the total value of the assets disposed: nonfinancial asset transactions are recorded in capital accounts (including fixed capital consumption), and financial asset transactions are recorded in financial accounts; QAt is the value of other positive or negative change in the volume of these assets, such as the discovery of underground assets or the retirement of an asset (due to a war or natural disaster): These changes are recorded in the other change in the volume of assets account RAt is the value of positive or negative nominal holding period yield generated from the changes in the prices of the type of assets: these changes are reflected in the revaluation account Obviously, the total amount of a certain type of assets and liabilities also fully meet the above equation, which is the theoretical basis for indirect estimation of national balance sheet Since 2004, China has conducted the national economic censuses regularly to carry out comprehensive and systematic investigation on various types of enterprises in various industries So far, China has conducted three economic censuses in 2004, 2008 and 2013 respectively, and the relevant data has mostly been published Economic census is a systematic survey on units of various types of ownership and in different sizes In the economic censuses, we have collected a large amount of basic data on the development of industries, construction and services, including number of units, employment, financial revenue and expenditure, assets and liabilities, main production and business activities of enterprises, production capacities, main raw materials, energy consumption and science and technology development investment Economic census mainly aims to comprehensively investigate the scale and layout of industries in China, learn the status quo of industrial organization, industrial structure and industrial technology and the composition of all factors of production, have a clear picture of the basic situation of various types of units in China and comprehensively update the basic information databases of all industries in the national economy Therefore, we can make use of the data collected in the economic censuses to improve and supplement the Appendix A: An Explanation on the Main Preparation Methods of This Book 231 accumulation accounts and balance sheets in China, which should also be deemed as a main purpose of the economic censuses With the stock data in the base year, the flow of funds accounts provides the flow data necessary for estimation China’s flow of funds accounts starts from 1992 and is divided into two parts: the physical transaction accounts prepared by the NBS and the financial transaction accounts prepared by the PBC The physical transaction accounts actually correspond to the distribution of income account and the use of income account in current accounts of SNA 2008 as well as the capital account in accumulation accounts The financial transaction accounts correspond to the financial accounts According to the accounting principle discussed in Part 2, there are difficulties in three aspects in our estimations First, the absence of revaluation account That is, China’s current statistics not involve revaluation of related assets We have taken a very simple method to make it up That is, the fixed asset price index was adopted to adjust the prices of non-financial assets As fixed assets are only part of total assets and also only a part of non-financial assets, this is an expedient measure Second, the absence of the other change in the volume of assets account before 2000 The “Acquisitions Less Disposals of Other Non-financial Assets” account started to appear in 2000 Although this account greatly fluctuates, it has more or less made up for the previous absence Based on the reality in China, such change is relatively small, so it will not have great impact on the estimation results Third, the net financial investment in the physical transaction accounts and the financial transaction accounts of the flow of funds accounts is not equal That is, the difference between capital formation and total savings of non-financial corporations on the physical transaction accounts is greater than the difference between financial sources and use of funds in the financial transaction accounts There are many reasons for such differences In terms of physical transaction accounts, the gross capital formation may be overestimated, or the total savings may be underestimated; and in terms of financial transaction accounts, the source of funds may be underestimated, or the use of funds may be overestimated The treatment in this book is based on the physical transaction accounts That is, we believe that there is a great possibility that the financial transaction accounts have underestimated the source of funds and overestimated the use of funds In this way, it is necessary to add the balancing item in debt estimation, which will greatly affect the final results In some years, it was about 30% of the total liabilities The entire estimation is decided by the following two equations: on the asset side, the total assets in the current period = the total assets in the previous period  (0.5 + 0.5  the fixed asset price index) + the gross capital formation in the current period + acquisitions less disposals of other non-financial assets in the current period + the total use of funds in the current period; on the liability side, the total liabilities in the current period = total liabilities in the previous period + total sources of fund in the current period + net financial investment in the current period (financial transaction accounts) − net financial investment in the current period (physical transaction accounts) In the equation on the asset side, it is assumed that financial assets and non-financial assets account for half of total assets, and price 232 Appendix A: An Explanation on the Main Preparation Methods of This Book adjustment is only needed for non-financial assets Such treatment is relatively rigid, but price adjustment each year is moderate, so it will have relatively limited impact on the final result On the basis of the previous two equations, it is necessary to make adjustments empathetically in three aspects First, after the economic census in 2013, the NBS has made a comprehensive adjustment of the GDP data, and the related data have been adjusted at equal proportion based on the latest data to ensure that they are consistent with the nominal GDP Second, after the preliminary estimation results were obtained with 2004 as the base year, on the premise of not changing a series of proportional relations such as debt to assets ratio, the second adjustment of the data of each year was made based on the total assets in 2008 and 2013 Third, China’s latest data on the flow of funds accounts are only available till 2012, so the data for 2013 and 2014 were obtained through reasonable estimation The main method is to make use of the relatively stable proportional relations between the estimates and some known data, such as the gross capital formation of non-financial corporations and the gross capital formation of the whole society, the sources of fund of non-financial corporations and the aggregate financing of the whole society In the selection of specific proportions and estimates of some other quantities, three-year averages and simple trend extrapolation were mainly used A.4 Preparation Method for the Balance Sheet of Households Here we will give some explanations on this balance sheet In terms of non-financial assets of households: first, due to the unavailability of data, this study has defined non-financial assets as household housing assets, rural productive fixed assets and cars based on the method proposed by Liu Xiangyuan et al (2009) But the inventories of the household sector defined by NBS (2007) not include households’ grain reverses, livestock inventories and inventories of self-employed industrial and commercial households Second, the value of housing assets is calculated separately by urban and rural residents For details, please refer to Part of China’s National Balance Sheet 2013 It should be pointed out that as Statistical Yearbook of China 2014 does not disclose the per capita living area of urban and rural residents, housing value of rural residents and other data for 2013, the missing indicators were extrapolated according to the average increase of estimated value over the previous five years (i.e the data for 2013 were obtained according to the average increase during 2008–2012) The values of urban and rural housings in 2014 were directly extrapolated according the data for 2009–2013 Third, with regard to “cars”, due to unavailability of car sale data, the income from main business (or sales income) of the leading car products for the previous years released in China Automotive Industry Yearbook is used here, and the value of car asset stock held by residents was estimated based on the method proposed by Liu Appendix A: An Explanation on the Main Preparation Methods of This Book 233 Xiangyuan et al Since the cited data are different, the value here and the estimate of Liu Xiangyun et al are not directly comparable, but given the relatively small size of car assets, this difference has little impact on the total assets of households In addition, it should also be noted that, due to unavailability of data, the value of car assets of households in 2012, 2013 and 2014 was not direct calculated, but estimated by the extrapolation method As the size of this part of the asset is relatively small (for example, in 2011 car assets accounted for only 5% of non-financial assets of households and 3% of total assets of households, so this adjustment has a limited impact on the overall estimate) Fourth, the “rural productive fixed assets” was calculated based on “the original value of productive fixed assets of rural households”, “the average number of people per rural household” and “the rural population” released by the Statistical Yearbook of China Similarly, due to lack of data, the original values of rural productive fixed assets of 2013 and 2014 were also obtained by the above mentioned extrapolation method In terms of financial assets of households, the financial assets of households for 2004–2010 listed in this table are directly cited from China Financial Stability Report 2012 However, as the People’s Bank of China did not disclose the corresponding data in the subsequent reports, the data for 2011 and 2012 presented here were calculated based on the stock data and the flow of funds accounts (financial transactions) of the previous year Only the two items of “Wealth Management Products of Financial Institutions” and “Fund Trust Plan” are directly cited from China Financial Stability Report The four items of “Deposits”, “Stocks”, “Wealth Management Products of Financial Institutions” and “Fund Trust Plan” for 2013 and 2014 are China Financial Stability Report 2014 and China Financial Stability Report 2015, and other items were obtained by the above mentioned extrapolation method By definition, the liabilities of the household sector refer only to financial liabilities, while the latter in this study are limited only to loans As loans are only roughly classified in China Financial Stability Report, the data for 2007–2014 here were cited from the data for December of various years in Sources and Uses of Credit Funds of Financial Institutions in RMB (by Sectors) prepared by the People’s Bank of China As this statistics began in 2007, and the data for the previous year were directly cited from China Financial Stability Report 2012.5 In addition, according to the compilation framework of NBS (2007), the external financial assets and liabilities of the household sector are blank items It should be noted that, as far as the household sector is concerned, the data of Sources and Uses of Credit Funds of Financial Institutions in RMB and Sources and Uses of Credit Funds of Financial Institutions in RMB and Foreign Currency are extremely similar, so the difference is negligible For example, in December 2011, the household loans in the two reports was 13.6 trillion yuan and 13.61 trillion yuan respectively 234 Appendix A: An Explanation on the Main Preparation Methods of This Book A.5 Estimation Method for the Whole Society Leverage Ratio According to MGI’s method (MGI 2010; 2012; 2015), we have estimated the leverage ratios of the four sub-sectors of households, non-financial corporations, government and financial institutions On this basis, we added up them to get the total leverage ratio of the whole society Leverage Ratio of the Household Sector The leverage ratio of the household sector was estimated according to the proportion of the outstanding balance on loans in the household sector given in Sources and Uses of Credit Funds of Financial Institutions in RMB and Foreign Currency (by Sectors) prepared by the People’s Bank of China to GDP Leverage Ratio of Non-Financial Corporate Sector The total amount of funds acquired by the non-financial corporate sector from the financial system can be estimated by three levels within the framework of total amount of social financing At the first level, the non-financial corporate sector gains financial support through traditional loan channels The data are from the outstanding loans to non-financial corporations and other sectors in Sources and Uses of Credit Funds of Financial Institutions in RMB and Foreign Currency (by Sectors) prepared by the People’s Bank of China At the second level, the non-financial corporate sector raises funds directly from the financial market through debt instruments, mainly including corporate bonds, short-term financing bonds, medium-term notes and corporate bonds and the like The data are from the statistics of the bond market about the size of outstanding trust bonds At the third level, the non-financial corporate sector raises funds through credit intermediation activities outside the banking sector, mainly including trust loans, entrusted loans, banker’s acceptance bills and other forms In our previous estimation, we added up the data of the following items to get the size of this part of financing: the loan business data of trust companies released by China Trustee Association, the cumulative flow of entrusted loans in Aggregate Financing to the Real Economy released by the People’s Bank of China and the difference between the amount of ending unexpired commercial bills and the ending balance of discount in China Monetary Policy Report released by the People's Bank of China In February 2015, the People’s Bank of China released China Monetary Policy Report (Stock) for the first time According to the statistics, the balance of trust loans at the end of the year, the balance of entrusted loans at the end of the year and the balance undiscounted bank acceptance bills were added up to get the amount of money lent by the entire financial system to the non-financial corporate sector through quasi shadow banking channels Appendix A: An Explanation on the Main Preparation Methods of This Book 235 Adding up the aggregate financing at the above three levels, we have obtained the outstanding debt of the non-financial corporate sector, and its ratio to GDP is the leverage ratio of the non-financial corporate sector It should be noted that the estimated debt of the non-financial corporate sector here includes to a considerable extent the debt of LGFPs as entities with government background To prevent overlapping, it is necessary to deduct the estimated size of the debt of LGFPs Leverage Ratio of the Government Sector The data on central government debts are from the outstanding balance of central government debt (including internal and external debts) in National Government Final Accounts released by the Ministry of Finance Local government debts mainly consist of two parts: first, the debt of LGFPs that has aroused widespread concern in recent years; second, the local government debt outside LGFPs The debtors are local government departments and agencies, public institutions receiving financial subsidies, public utility institutions and other entities LGFPs mainly raise funds through three means First, bank loans The data are from CBRC’s statistics Second, issuing urban construction investment bonds (including corporate bonds, medium-term notes and short-term financing bonds etc) The data are from Wind’s statistics Third, infrastructure trust and other shadow banking channels The data are from the statistics of total trust loans invested in infrastructure projects in the major business data of trust companies released by China Trustee Association The sum of the above the three categories is the outstanding debt owed by LGFPs With regard to the local government debt outside LGFPs, according to the results of the two national audits of local government debt conducted by the National Audit Office and its growth trend, we have added up the local government debts inside and outside LGFPs to obtain the size of local government debts The sum of the debts of the central government and local governments is the total government debt, and its ratio to GDP is the leverage ratio of the government sector Leverage Ratio of Financial Institutions We believe that the main purpose of estimating the leverage ratio is to assess the risks, while currencies and deposits in the debt of the financial sector not constitute major risks or have less risks in the financial sector, so we have excluded currencies and deposits and only regard the balance of bonds issued by financial institutions as the debt of the financial sector Based on this method as well as the statistics of the inter-bank bond market, we have added up the balance of financial bonds of CDB, the balance of financial bonds of policy banks (refer to the policy financial bonds issued by the Export-import Bank of China and the Agricultural Development Bank) and the balance of other financial bonds (including subordinated debt of commercial banks, ordinary financial bonds, hybrid capital bonds, tier-2 capital instruments as well as debt of non-bank financial institutions such as finance companies of conglomerates, securities companies, financial leasing companies and automobile financial companies) and obtained the total balance of bonds 236 Appendix A: An Explanation on the Main Preparation Methods of This Book issued by financial institutions Its ratio to GDP is the leverage ratio of financial institutions we have estimated In the meanwhile, for the convenience of international comparison, we have also made reference to MGI’s method: add up the two items of “Claims on Other Depository Corporations” and “Claims on Other Financial Institutions”) and calculate the debt/GDP ratio References Accounting Yearbook of China (2013a) Statistical data of state-owned enterprises for 2012 Accounting Yearbook of China (2013b) Statistical data of government agencies and public institutions for 2012 Accounting Yearbook of China (2014a) Statistical data of state-owned enterprises for 2013 Accounting Yearbook of China (2014b) Statistical data of government agencies and public institutions for 2013 Allen M, 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J Quant Tech Econ 12 Zhang B, Wang X (2012) Analysis of factors affecting the changes in nominal income rate and real return rate of China’s foreign exchange reserves Soc Sci China (1) Zhen L (2014) Marketization of wage can break the pension inequality China Business News, August Postscript The National Balance Sheet Research Group of CASS was established in 2011 The head of the research group is research fellow Li Yang, director of CASS Economics Division and vice president of CASS, and the deputy head is Zhang Xiajing, assistant director and research fellow of CASS Economics Division The first achievements were formed in 2012, when the compilation of China’s national sovereign balance sheet (2000–2010) was completed The main achievements of this research group were published in Issue and of Economic Research in 2013 and won the first Sun Yefang Financial Innovation Award in 2015 At the end of 2013, the main achievements of this research group were compiled into a book entitled China’s National Balance Sheet 2013—Theory, Methodology and Risk Assessment, which was published by China Social Sciences Publishing House (2013) and won the National Soft Science Award in 2015 This shows that our balance sheet research has gained a wide range of social recognition and academic influence Based on the previous analysis, this book has fully updated the main data to 2014 (given the availability of data, some data were derived, so please keep prudent when using the data) The authors of this book are as follows: Chapters 1–4 of the General Report (Li Yang, Zhang Xiaojing and Chang Xin), Chap (Chang Xin), Chap (Wang Hongju), Chap (Tang Duoduo), Chap (Li Cheng), Chap (Zhang Lei), Chap 10 (Peng Xingyun), Chap 11 (Li Yu), Chap 12 (Liu Xueliang), Chap 13 (Gao Zhanjun and Cao Wei) © China Social Sciences Press and Springer Nature Singapore Pte Ltd 2018 Y Li et al., China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management, https://doi.org/10.1007/978-981-10-7733-3 241 ...China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management Yang Li Xiaojing Zhang Xin Chang • China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management. .. 2018 Y Li et al., China’s National Balance Sheet (2015): Leverage Adjustment and Risk Management, https://doi.org/10.1007/978-981-10-7733-3_1 Main Report: Leverage and Risk Management In this study,... time 1.2 Leverage Adjustment and Risk Management 1.2 1.2.1 11 Leverage Adjustment and Risk Management Description of the Aggregation Method In this report, we have estimated the level of leverage