In a recent interview with Phoenix New Media, Yang Weimin, deputy director of the Chinese Subcommittee of Economy and former deputy director of the Central Financial and Economic Affairs Commission, mentioned that China's economic development is facing three major structural imbalances, and the biggest risk in the financial sector is still excessive leverage, therefore deleveraging should be given focus on. Yang Weimin believes that China's current economic development faces three major structural imbalances. The first is the structural imbalance between supply and demand in the real economy, which is due to the distortion of factor allocation. The second is the imbalance between the financial and real economy and the excessive development of the financial industry. The more developed the financial industry, the heavier the real economy may be. The third is the imbalance between real estate and the real economy. Yang Weimin emphasized that progress should be made steadily and that the government should not intervene in the economy frequently. He also pointed out that it would be necessary to persist in reform and opening up, tread the path of the market economy, adhere to the fundamental thoughts, and not triggering financial risks.

As a think tank official who has long been involved in the work of China's top financial decision-making body, Yang Weimin's speech deserves attention.

It can be seen from Yang Weimin's remark that the structural imbalance between supply and demand in the real economy is due to the distortion of factor allocation. A huge sum of money is being used in zombie companies and local government debt; a lot of money is roll-over loans, and there are too few loans that can really support the new economic activities to create GDP. Zombie companies are exacerbating resource mismatches, yet banks and local governments are reluctant to see zombie companies go bankrupt. Because the banks cannot freely credit, the bankruptcy of the zombie enterprise will increase the bank's non-performing loan ratio. At the same time, for local governments, the annual value added of zombie companies is still there. The reason why even if there is a lot of profit yet at the same time there is insufficient money because a considerable part of the money is invested in the dead storage, all are roll-over-loans.

Therefore, the deleveraging of state-owned enterprises is the focus of current deleverage. Among the real economy sectors, non-financial enterprises have the highest leverage ratio in China. Although the asset-liability ratio of China's state-owned enterprises has shown a downward trend after the efforts of the authority, the current leverage is still concentrated in state-owned enterprises. Looking from the central enterprises, as of the end of June this year, the average asset-liability ratio of central enterprises was 66%, a decrease of 0.3% from the beginning of the year and a decrease of 0.5% year-on-year. The asset-liability ratio of state-owned enterprises in the first half of 2018 was 64.93%, a decrease of about 1% from the same period of last year. However, in the horizontal comparison, the asset-liability ratio of state-owned enterprises is still significantly higher than that of private enterprises. In July 2018, the average asset-liability ratio of Chinese enterprises in China's industrial enterprises was 59.4%, which was nearly 4% higher than that of private enterprises in the same period. Statistics show that in the different sectors, the highest leverage is in the corporate sector, while more than two-thirds of the debt in the corporate sector is concentrated in state-owned enterprises. Among the current state-owned enterprises, the industry with the highest asset-liability ratio is precisely the three industries with the most severe overcapacity in China today; these are also the three industries with the greatest impact and the most need for reform, namely, chemical, coal and steel. Practically speaking, these industries have large and expensive fixed assets, and the types of enterprises are mostly capital-intensive and have the characteristics of high leverage. The deleveraging of state-owned enterprises has become the top priority of structural deleveraging work.

In addition, the differences in the deleveraging of state-owned and private enterprises reflect the rise of state-owned enterprise assets and the shrinkage of those of private enterprise; this is a more obvious problem in the first half of the year. Private industrial enterprises have a clear trend of leverage, and the asset-liability ratio has risen from 51.6% at the end of last year to 55.8%. The increase in the asset-liability ratio of private enterprises is mainly due to the serious decline in assets. The asset-liability ratio of state-owned enterprises has declined, though assets and liabilities have also contributed to this, the increase of the assets has contributed more. The ability of state-owned enterprises to generate income is lower than that of private enterprises. The debt-to-income ratio of state-owned enterprises reaches 200%, which is higher than the leverage ratio of non-financial enterprises (156%). Concerning solvency, the debt risk of state-owned enterprises is still more serious. The high leverage ratio of state-owned enterprises causes not only financial risks, but also China's financial resources to be occupied by a large number of inefficient and inactive state-owned enterprises, especially zombie companies, resulting in imbalanced production capacity, and the credit high-efficiency private enterprises and high-tech industry being squeezed out, which ultimately macroeconomic growth can also trigger financial risks.

With the dependency of state-owned enterprises and local governments, the mismatch of financial resources makes the financial industry to become more developed, which means the burden on the real economy would be heavier. Yang Weimin believes that the financial industry is over-developed, and the mechanism for the transmission of money from the financial system to the real economy is not exactly smooth. Currently, the financial industry is developing rapidly, yet the problems of non-standard, local debt and shadow banking are still quite obvious. These so-called "innovations" are still essentially regulatory arbitrage under the rigid financial system, increasing the cost of financial resource allocation. It does not improve efficiency, and China now pays at least RMB 50,000 to RMB 60,000 interest a year, which is the peak of the financial industry. The profits of the financial industry are much higher than those of other industries, which essentially squeezes out the profits of the real economy. In the context of the low actual efficiency of state-owned enterprises, including zombie companies, the burden of excessive leverage may be unbearable for future state-owned enterprises and the entire real economy. It is also a major risk issue faced by the financial industry in China.

Not long ago, the deepening of the state-owned enterprise reform conference once again emphasized that state-owned enterprises should "bigger, better and stronger," this is to promote the all-rounded development of state-owned enterprises, and the reform of state-owned enterprises should be changed to mixed reform, which would further expand the territory of state-owned enterprises. As a think tank official who once occupied a high decision-making position, Yang Weimin clearly pointed out the key impact of the development of state-owned enterprises on China's rising leverage and the inefficiency of bank credit to the bottomless pit of state-owned enterprises. It is clear that state-owned enterprises have played an important role in the formation of China's high leverage. In the past, the large size of many state-owned enterprises and their high debt are a direct result of the slogan of "bigger and stronger" for state-owned enterprises. The cause of the problem of deleveraging lies in the mechanism of state-owned enterprises and the allocation of financial resources. It is impossible for the people to pay for the cost of state-owned enterprises' problem. In the context of slowing down the overall economic operation, concerning the controversy between national and private, it is still necessary to follow the law of economic operation, and not skipping the stages of the law.

Final analysis conclusion:

Anbound believes that if the financing mechanism remains unchanged in the future, the state-owned enterprise mechanism and operation will remain unchanged, and the funds invested in state-owned enterprises will still form new leverage due to their inefficiency. But unfortunately, the high leverage driven by state-owned enterprises has made the entire Chinese market to bear the price. Therefore, to prevent financial risks, what state-owned enterprises need most is to "become better and stronger" rather than "become bigger".