Nov 03, 2021 09:06 PM

Chart of the Day: China’s Debt-to-GDP Ratio Declines for Fourth Straight Quarter

China’s debt-to-GDP ratio declined for the fourth straight quarter amid suppressed demand for funds by nonfinancial enterprises, notably real estate companies, a new report from a state-backed think tank shows.

The macro leverage ratio, which measures total outstanding nonfinancial debt as a share of nominal GDP, dropped to 264.8% at the end of September, edging down from 265.4% at the end of June and compared with a record high of 271.2% a year earlier, according to a report released Tuesday by the National Institution for Finance and Development (NIFD). Nonfinancial debt refers to the borrowings of households, companies and government and excludes entities in the financial sector such as banks and insurance companies.

 The small but steady decline in macro leverage follows renewed emphasis on a long-standing campaign to defuse risks in the economy that was one of the “three critical battles” outlined by President Xi Jinping in 2017. Although the government loosened the purse strings in 2020 to help the economy recover from the Covid-19 epidemic, it put deleveraging back at the top of the agenda in the third quarter of 2020. It especially targeted real estate developers and the central bank and the housing ministry introduced a “three red lines” policy to control their debt. 

But the campaign has had consequences — the NIFD warned in its report that cooling demand for money by companies and local governments for investment purposes has dragged down economic growth.

“Economic recovery has been weak and companies lack the willingness to invest,” the report’s authors wrote. “Debt risks emerged in real estate enterprises and so growth in real estate investment slowed down… Stricter standards for the issuance of local government special-purpose bonds (SPB) dampened the growth rate of infrastructure investment.”

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In Depth: Record Local Government Debt Is Back in Policymakers’ Crosshairs

The decline in the macro leverage ratio slowed in the third quarter, falling 0.6 percentage points from the previous three months when it dropped 2.4 percentage points, a development the report attributed to lower-than-expected economic growth. In the third quarter, China’s GDP rose 4.9% year-on-year compared with 7.9% for the second quarter.

A breakdown of the data shows that nonfinancial corporations’ debt as a percentage of GDP dropped by 1.6 percentage points to 157.2% at the end of the third quarter from the end of June, as companies preferred to repay their debts and reduce the scale of new borrowing.

Growth in investment, a major driver of economic activity, has slowed down. Fixed-asset investment in the first nine months of 2021 rose 7.3% year-on-year, the seventh consecutive cumulative monthly decline, official data show. Tightened financing rules on the property sector fueled the slowdown and resulted in liquidity difficulties in a number of property firms, including China Evergrande Group.

The leverage ratio of the government, which includes central and local governments, was 0.9 percentage points higher at the end of September at 45.5%, accelerating from a 0.3 percentage point increase in the second quarter from the first three months of the year. The pickup can be attributed to a greater issuance of bonds, especially SPBs.

SPBs are a type of local government debt that funds infrastructure and public welfare projects that are commercially viable and are generally repaid from income generated from the specific projects they fund. Ministry of Finance data show that issuance was slow in the first part of the year as local authorities already had funds left over from 2020 and their appetite for investment weakened. The ministry strengthened its performance assessments of local governments’ use of SPB proceeds this year, and some projects that were unable to generate stable cash flow returns failed to be approved, the report said.

But from August, SPB issuance started to accelerate as the ministry told them to speed up sales and meet their annual quotas by November. 

The report’s authors recommended that monetary policy should be eased moderately to shore up investment and help companies obtain financing. They also proposed that policymakers increase the share of sovereign bonds and local government general bonds in total government debt to support public spending expansion and infrastructure investment.

Contact reporter Guo Yingzhe ( and editor Nerys Avery (

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