Deleveraging: Data, Risks and Countermeasures*

Zhang Xiaojing1 and Chang Xin2 1National Institution for Finance & Development, Chinese Academy of Social Sciences (NIFD, CASS) 2National Center for Balance Sheet Research

China Economist - - Articles -

Abstract: Based on the latest macro financial data, this paper estimates China’s overall leverage ratio and sector-specific leverage ratios for households, non-financial enterprises, government and financial institutions. It is noted with particular emphasis that the tendency of non-financial enterprises to increase leverage has further intensified instead of abated, which warrants our great attention. Considering that increasing leverage of government sector represents a basic international trend since the eruption of global financial crisis, we simulate the paths of dynamic evolution of China’s debt-to-GDP ratio on the basis of different scenarios of the difference between real economic growth rate and real interest rate, together with the NPL ratio of banks. Result indicates that in the coming two decades, the leverage ratio of China’s government sector will continue to rise and will not converge. Hiking leverage ratio, growing debt burden and rising non-performing assets present major financial risks facing China for a certain period of time in the future. Under the premise of supply-side structural reforms and in tandem with the efforts of the real economy to reduce overcapacity, inventory and eliminate zombie firms, we suggest that China focus on disposing of non-performing assets and steadily deleverage through the implementation of integrated strategies to prevent debt problems from triggering systemic financial crisis

Keywords: leverage ratio, risk, supply-side structural reforms JEL classification: G38, E50

Since the eruption of the recent round of global financial crisis in 2007, deleveraging became an important priority for advanced economies in countering the impact of the crisis. In China, the Fifth Plenary Session of the 18th CPC Central Committee in October 2015 adopted the strategic mandate to “reduce the leverage ratio.” Subsequently, the Central Economic Work Conference held at the end of 2015 identified deleveraging as a major component of supplyside structural reform and a top priority on China’s policy agenda.

An excessive leverage ratio implies financial risks. Rumors about China’s potential debt crisis largely emanated from China’s soaring leverage ratio. Seemingly a cyclical issue, deleveraging actually entails structural adjustment of the economy as a whole. Meanwhile, there is a major trade-off between deleveraging as a global issue and the stability of aggregate demand. Given its complex nature, we believe that deleveraging should be carried out in a targeted, proactive and prudent manner in line with the requirements of *

Prof. Li Yang was the general leader for this report; Tang Duoduo, Li Cheng, Liu Xueliang and Li Yu, who are members of the National Balance Sheet Task Group, also contributed to this report. Corresponding author: Zhang Xiaojing, 9F Jing Guang Centre Office building, Hujialou, Chaoyang, Beijing, China ( 100020). Email:


Buttiglione, Luigi, Philip R. Lane, Lucrezia Reichlin, and Vincent Reinhart. 2014. “Deleveraging, What Deleveraging?” The 16th Geneva Report on the World Economy.

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