In the second quarter of 2023, China’s macro leverage ratio rose from 281.8% at the end of Q1 to 283.9%, an increase of 2.1 percentage points. This brought the cumulative rise for the first half of the year to 10.8 percentage points. Although year-on-year debt growth stood at only 9.3%—near the lowest level since 2000—GDP growth declined at an even faster pace, resulting in continued upward pressure on the macro leverage ratio. For the full year, the leverage ratio is expected to increase by more than 11 percentage points, with a continued rise in Q3 and a slight decline anticipated in Q4.

The household sector posted the smallest increase in leverage, up by just 0.2 percentage points. Notably, growth in residential mortgage lending turned negative on a year-on-year basis. The leverage ratio of the non-financial corporate sector edged up by 0.8 percentage points, reflecting subdued financing demand and a further slowdown in investment growth. The government sector recorded the largest increase, rising by 1.1 percentage points, though the impact of fiscal expansion remained limited.

In light of the risk of a “non-typical” balance sheet recession, the central government should consider a dual strategy: on the one hand, expand its own balance sheet, particularly through increased bond issuance; on the other hand, implement a sizable interest rate cut to reduce the interest burden on the large stock of outstanding debt. Based on current debt levels in the real economy, a 1-percentage-point cut in interest rates could reduce interest payments by nearly RMB 4 trillion—equivalent to more than a 3-percentage-point increase in the fiscal deficit ratio—thereby exerting a significant stimulative effect on the economy.

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