China’s Macro Leverage Ratio Edges Up to Fresh Record

China’s macro leverage ratio reached a new peak in Q2 2024, albeit with a slower growth rate compared to Q1, due to weakening borrowing by households and businesses, according to a report by a state-backed think tank [para. 1]. The ratio, indicating nonfinancial debt as a percentage of GDP, rose to 295.6% at the end of June, a 0.8-percentage-point increase from 294.8% at the end of March. This increment was significantly lower compared to the 6.8 percentage points growth seen in the first quarter of the year [para. 1][para. 2].

The think tank projected that the macro leverage ratio would further ascend by 10 percentage points by the end of 2024, up from 288% at the end of 2023 [para. 3]. According to the report, China's leverage ratio is rising, contrasting with other major economies entering a deleveraging cycle since 2021, primarily due to divergent inflation trends [para. 4]. While developed economies have been grappling with prolonged high inflation post-Covid-19, China’s inflation has been subdued, with its GDP deflator turning negative in six of the past seven quarters [para. 5].

The think tank suggested that the Chinese government should enhance countercyclical measures and increase inflation rates to improve business confidence, stimulate economic growth, and curb the rapid rise in the macro leverage ratio to mitigate financial risks [para. 6]. Nonfinancial debt encompasses the borrowings of households, nonfinancial firms, and the government [para. 7]. The report highlighted an 8.3% year-on-year increase in outstanding liabilities for these sectors by the end of June, the slowest rise since 2001, compared to an 8.8% growth three months earlier [para. 7].

Despite the deceleration in debt growth, it still outpaced nominal GDP, which grew by 4% year-on-year in Q2, down from 4.2% in Q1. In real terms, accounting for inflation, China's economy expanded by 4.7% in Q2, slowing from 5.3% in Q1 [para. 8]. The household sector’s leverage ratio dipped slightly by 0.5 percentage points to 63.5%, owing to a decrease in household loan growth, which fell to 3.8% year-on-year as of June’s end from 5.1% three months earlier. Consumer loans, including mortgages, saw a year-on-year growth slowdown to 0.7% from 1.4% [para. 11].

Despite measures introduced in May to ease mortgage rules, such as lifting minimum mortgage interest rates, mortgage demand remained low, contributing to the slowest growth in household borrowing, thereby affecting the sector’s leverage ratio [para. 12]. The nonfinancial corporate sector’s leverage ratio only edged up by 0.2 percentage points to 174.3%, a record high, yet much lower than the 5.7 percentage points rise witnessed in Q1. This discrepancy might be due to banks inflating lending data to boost local GDP growth [para. 13][para. 14].

The central bank and the National Bureau of Statistics modified the metrics for gauging the financial sector’s GDP contribution, focusing on bank profits instead of loans and deposits. This shift aimed to tackle practices where companies took low-interest loans primarily to deposit and benefit from interest rate spreads, artificially inflating loan and deposit figures [para. 15][para. 16]. The government sector's leverage ratio rose by 1.1 percentage points to 57.8%, with local government and central government ratios at 33.2% and 24.6%, respectively. The think tank forecasts a further increase in this ratio in H2 2024, although specific numbers were not provided [para. 17].