Appendix A An Explanation on the Main Preparation Methods of This Book. A.1 Preparation Method for the National Balance Sheet

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1 Appendix A An Explanation on the Main Preparation Methods of This Book To make it convenient for readers to have a better understanding of the main preparation methods involved in this book, here we give an explanation of the preparation and estimation methods for the national balance sheet, the sovereign balance sheet, the balance sheets of main sectors and the whole society leverage ratio. A.1 Preparation Method for the National Balance Sheet A national balance sheet aims to study a country s overall economic stock. According to the SNA 2008 jointly developed by the UN, IMF, OECD and the Commission of European Communities, the balance sheet of a country includes 6 major sectors: non-financial corporations, financial institutions (including the central bank), 1 general government (including the governments at all levels, social security funds and non-profit organizations controlled by the governments), residents (also called households), non-profit organizations serving households (NPISHs), 2 and the non-household sector (i.e. the external sector). Based on the relevant international standards and the related description of NBS (2007), we have compiled the simple framework of national balance sheet suitable for China s national conditions (see Table. A.1). In the table, the main columns cover assets, liabilities and their differences, and the auxiliary columns cover various sectors of the national economy and their aggregates. 1 The central bank was also included in the government sector by some scholars, such as Allen et al. (2002). 2 They refer to non-government-controlled organizations that serve households free of charges or charging only nominal fees, including professional associations, religious organizations, charities and research institutes. China Social Sciences Press and Springer Nature Singapore Pte Ltd Y. Li et al., China s National Balance Sheet (2015): Leverage Adjustment and Risk Management, 219

2 220 Appendix A: An Explanation on the Main Preparation Methods of This Book Table A.1 Framework of national balance sheet Non-financial assets Fixed assets Inventory Other non-financial assets (land, intangible assets, deferred assets and other assets) Financial assets/liabilities (I) Domestic financial assets/liabilities Currencies and deposits Loans Stocks and other equities Debt securities Insurance reserves Other receivables/payables (II) External financial assets/liabilities Direct investment Security investment Other investments (III) Reserve assets Gold reserves and special drawing right Foreign exchange reserves Difference between assets and liabilities (net asset) Non-financial corporations Financial institutions Governments Households Total of domestic sectors External sector Total

3 Appendix A: An Explanation on the Main Preparation Methods of This Book 221 The basic logic relationship of balance sheet can be broadly summarized as follows: (1) Total assets = liabilities + net assets (2) Total assets = non-financial assets + financial assets Given that liabilities are actually financial liabilities 3 and as the financial claims (of a country) and the financial liabilities (of another country) in the national balance sheet are mirror images, they occur simultaneously and are equal in size and opposite in direction. That is, on a global scale (or in all economies), financial assets = financial liabilities, so we can combine (1) and (2) to obtain: (3) Net assets = non-financial assets To make equation (3) tenable, the premise is to include the external sector. To include the external sector is, on the one hand, to meet the need for accounting balance, and on the other hand, it will only make sense for an international organization that regards the global economy as a whole like the United Nations or the IMF to study the external sector (in Table A.1, the global economy is regarded as the study object). As far as individual economies are concerned, the aggregate of the domestic sectors has a real sense, so the two columns of external sector and aggregate can be ignored. Going a step further, financial assets/liabilities include 3 items: item (I) is domestic financial assets/liabilities, and item (II) and (III) are actually International Investment Position (IIP) as we usually refer to. Because domestic financial assets = domestic financial liabilities (that is, the assets and liabilities in item (I) are fully offset), then the total net financial assets of the domestic sectors are equal to the sum of item (II) and (III) and also equal to net IIP, so there exists: (4) Net assets of the domestic sectors = non-financial assets + net financial assets of the domestic sectors = non-financial assets + net IIP Comparing (3) and (4), we can find that, when specifically studying an economy, the consolidated balance sheet tends to lose a lot of useful information. Therefore, SNA 2008 takes a reserved attitude towards the consolidation of balance sheets. The sectoral division, subject categories, aggregation methods for national balance sheets and some accounting equations given above constitute the theoretical basis for the preparation of balance sheet. According to the analytical framework described above, we have tentatively prepared China s national balance sheet using publicly available data and relevant theoretical assumptions and estimation methods. The asset side of national balance sheet includes the two major items of non-financial assets and financial assets. Non-financial assets include households 3 As the debtor-creditor relationship does not exist for non-financial assets, they only reflect the asset side of the holder, i.e. the user, but are not reflected in the liability side, i.e. the originator. Thus, the liability side of balance sheet only includes financial liabilities.

4 222 Appendix A: An Explanation on the Main Preparation Methods of This Book real estate and automobiles, rural productive fixed assets, cooperate fixed assets, inventories, fixed assets of government organs and public institutions, intangible assets of public institutions and government-owned resource assets (land); financial assets include currencies, deposits, loans, bonds, stocks, securities investment fund shares, clients margins of securities companies, insurance reserves, settlement funds, transactions of financial institutions, reserves, cash holdings, lending of the central bank, other items (net), foreign direct investment, other external claims and obligations, and international reserve assets. The liabilities side includes currencies, deposits, loans, bonds, stocks, securities investment fund shares, clients margins of securities companies, insurance reserves, settlement funds, transactions of financial institutions, reserves, cash holdings, lending of the central bank, other items (net), foreign direct investment, other external claims and obligations, international payment errors and omissions and other items. By definition, liabilities refer only to financial liabilities, without physical counterparts. The difference between assets and liabilities is net assets, which corresponds to the owner s equity or capital in the financial statements of enterprises. Here are some explanations about the estimates: (1) non-financial assets mainly include the relevant assets of the sectors such as households, non-financial corporations and governments. (2) The basic method to estimate financial assets and financial liabilities is to add up the flow data of the following years on the basis of the stock of funds accounts of a base year. Based on this idea, in this study, we added up the data of the domestic sectors in the flow of funds accounts (financial transactions) of the following years published by the National Bureau of Statistics (NBS) on the basis of the research on China s national financial assets and liabilities in 1998 conducted by NBS (Department of National Accounts, NBS, 2003). 4 We did not use the sectoral accumulation method because it is difficult to ensure complete correspondence and matching between assets and liabilities through direct accumulation as there may be differences in the estimation methods and data sources of various sectors. (3) As the stock of funds accounts in 1998 did not include the items such as securities investment fund shares, clients margins of securities companies, settlement funds, transactions of financial institutions, reserves, cash holdings, lending of the central bank, and international payment errors and omissions, we added up only the flow data of the previous years (the data of the flow of funds accounts published by NBS from 1992). (4) Given that the 1998 stock of funds accounts and the flow of funds accounts of the previous years were not entirely consistent in items, when determining the base year data, necessary adjustment was made for the two items of Other Items (Net) and Other External Claims and Obligations. 4 In fact, the People s Bank of China Survey and Statistics Division has completed a number of years the preparation of financial funds table. If the data is available, the estimate may be better.

5 Appendix A: An Explanation on the Main Preparation Methods of This Book 223 A.2 Preparation Method for the Sovereign Balance Sheet The sovereign sector here is also known as the general government, mainly including the central government, local governments, state-owned non-financial corporations, government organs and public institutions, the central bank and state-owned financial corporations. To prepare China s sovereign balance sheet, we have made full use of the existing statistical data and come up with a large number of data estimated based on the relevant economic theories that can not be acquired directly. In the paragraphs below, we will make an explanation on the data sources and estimation methods for the components of sovereign assets and liabilities respectively. 1. Operating State-Owned Assets Operating state-owned assets include state-owned assets of non-financial corporations and financial corporations. Among them, the (total) state-owned assets of non-financial corporations are obtained by adding up the total state-owned assets and liabilities of state-owned corporations, and the data are from Finance Yearbook of China of the relevant year (the data for 2014 were estimated by the trend extrapolation method). It should be noted that the total amount of state-owned assets of state-owned corporations here is actually a concept of state-owned equity. Apart from the state-owned equity, the total owner s equity (i.e. total net assets) of state-owned corporations also include the equity of other owners (such as the equity of foreign, Hong Kong, Macao and Taiwan-funded enterprises, collective enterprises or individual owners in joint-venture, cooperative and joint-stock state-owned corporations). Only the state-owned equity in state-owned corporations from which the equity of other owners as mentioned above has been deducted can be really disposed and used by the government. Of course, from a dynamic point of view, non-performing assets of state-owned corporations generated during operation should also be deducted from the state-owned equity. In other words, the actual amount of assets that can be used by the government to pay off its debts may be smaller than the size of the existing state-owned equity. The data on state-owned assets of financial corporations in operating state-owned assets are estimated according to the relevant data of the Ministry of Finance and Finance Yearbook of China. Among them, the data for the years since 2009 on state-owned assets of central and local financial corporations are obtained by adding up the data in the balance sheets of the relevant central and local financial corporations (the data for 2014 were estimated by the trend extrapolation method). It should be noted that, as the equity of other state-owned legal persons in the central financial corporations has been largely reflected in the state-owned assets of non-financial corporations, we have excluded it and obtained the state-owned assets of the Ministry of Finance (including Central Huijin Investment Ltd.) (the equity in 2011 was not excluded due to lack of the relevant data). A part of state-owned

6 224 Appendix A: An Explanation on the Main Preparation Methods of This Book assets of local financial corporations have also been reflected in the balance sheets of non-financial state-owned corporations (based on the research experience, a large part of state-owned assets of local financial corporations belong to the legal persons of state-owned corporations), but due to lack of further data, it is impossible to estimate the share of non-financial state-owned corporations in the state-owned assets of local financial corporations, so it is impossible to exclude these assets. As it is impossible to acquire the data of directly through calculation, we have come up with the estimates. The core step is to acquire the data on the owner s equity of the financial industry based on the data released by the Ministry of Finance and Finance Yearbook of China. According to the mean value of the data of 2009 and 2010, the equity of central and local financial corporations accounted for 56 and 44% respectively, the state-owned assets belonging to the Ministry of Finance accounted for 60% of the owner s equity of the central financial corporations, and 40% of the owner s equity of local financial corporations was state-owned assets. Based on the research experience, this proportion remained largely stable in recent years. On the basis of the previous estimates on owner s equity, we have calculated the state-owned assets of central and local financial corporations in accordance with this proportion and then added them up to obtain the state-owned assets of the financial industry. Adding the above-mentioned state-owned equities and the financial bonds of the policy banks, we can obtain the (total) state-owned assets of the financial industry. 2. Non-operating State-Owned Assets The data on non-operating state-owned assets, namely state-owned assets of government organs and public institutions, are from Accounting Yearbook of China of the relevant years (the data for 2014 were estimated by the trend extrapolation method) 3. Government-Owned Resource Assets For this subject, we focus on estimating the value of land and resources. Here, we have made reference to the research ideas of the World Bank (2006). The basic method is to regard the present total value of land and resources (excluding oil, gas and mineral resources) as the sum of present discounted value of the net output from land and resources(i.e. total receipts less costs or resource rents) in a certain period in future. Due to the limitation in availability of data, we have not calculated separately the incomes of different categories of resources such as arable lands, grasslands and forests, but replaced it by the general term of total output value of agriculture, forestry, animal husbandry and fishery and used the rental rate of 40%. See the relevant contents in Part 3 of this book for the detailed estimation methods. 4. State-Owned Assets of National Social Security Fund The data are from CEIC and the relevant annual financial statements of the National Council for Social Security Fund. We have added up NSSF s equity capital and the personal account fund under the management of the National Council for Social Security Fund as entrusted by the provinces (autonomous regions and

7 Appendix A: An Explanation on the Main Preparation Methods of This Book 225 municipalities) where trials were carried out to fully fund the personal accounts for the basic old-age insurance and its investment proceeds, i.e. the equity capital of personal accounts fund, to obtain the total equity capital of the fund under the management of the National Council for Social Security Fund. It should be noted that, overlapped accounting may exist between the national social security fund as state-owned assets and the aforementioned state-owned assets of non-financial and financial corporations. The process of reduction or transfer of state-owned shares involves only the adjustment of the department that performs the functions of the investor. That is, the investor is adjusted from the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) or the Ministry of Finance to the National Council for Social Security Fund, and the aforementioned state-owned assets of non-financial and financial corporations have not been substantively transferred. Overlapped calculation may occur in NSSF s statistics of this portion of assets. 5. Governments Deposits at the Central Bank The data are from the balance sheets of the monetary authorities. Treasury deposits and other public finance-cash in bank (various fiscal budget fund deposits at commercial banks not included in treasury deposits and part of special fund deposits designated by the Ministry of Finance to be deposited at commercial banks, as bank deposits reflected in the asset item of administrative institutions) together constitute public finance-cash in bank. 6. Central Government Debts The data on the outstanding internal debt of the central government for are from CEIC; those for are from Statistical Yearbook of China (the outstanding internal debt of the central government has been officially released since 2006 when government debt balance management was implemented), and those for 2014 are from the data of National Government Final Accounts released by the Ministry of Finance. The data on sovereign external debt owed by the central government are from the State Administration of Foreign Exchange. Here we adopt the definition of broad-scope sovereign external debt. That is, under normal circumstances, the external debt of the private sector, including Sino-foreign joint venture financial institutions and Sino-foreign joint venture enterprises, should be repaid by the relevant entities, but once they are unable to make ends meet, and the external debt also ultimately needs be repaid by the central government. Therefore, we believe that it is necessary to include them into the statistics of sovereign external debt. Based on the above definition, the data for 2000 is the total external debt owed by the relevant ministries and commissions under the State Council, domestic banks and non-bank financial institutions and foreign-sino joint ventures; the data for 2001 is the total external debt owed by the relevant ministries and commissions under the State Council, domestic banks and non-bank financial institutions, foreign financial institutions and foreign-sino joint ventures; 他 he data of is the total external debt owed by the relevant ministries and commissions under the State Council, domestic banks, non-bank financial institutions

8 226 Appendix A: An Explanation on the Main Preparation Methods of This Book and Sino-foreign joint ventures; the data for 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 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. 7. 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. 8. Local Government Debts The data for 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 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 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.

9 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 ); 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 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 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 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

10 228 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 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 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 3 of China s National Balance Sheet 2013 and Chapter 12 of this book). The data for 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

11 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

12 230 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 satisfies the following formula: A t þ 1 ¼ A t þ G A t þ Q A t þ R A t In the formula, A t and A t þ 1 are the value of stock assets in the balance sheet at the beginning and end of the period respectively; G A t 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; Q A t 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. R A t 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

13 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 do 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 The Acquisitions Less Disposals of Other Non-financial Assets account started to appear in 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 ( 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

14 232 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 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) do 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 3 of China s National Balance Sheet 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 ). The values of urban and rural housings in 2014 were directly extrapolated according the data for 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

15 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 listed in this table are directly cited from China Financial Stability Report 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 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 In addition, according to the compilation framework of NBS (2007), the external financial assets and liabilities of the household sector are blank items. 5 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 trillion yuan respectively.

16 234 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. 1. 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. 2. 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.

17 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. 3. 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. 4. 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 do 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