In 2022, China’s economy exhibited a puzzling divergence between private sector “balance sheet dormancy” and a rising macro leverage ratio. On one hand, the overall debt growth of the real economy slowed to 9.5%, approaching the lowest level since 2000. Household debt growth fell to just 5.4%, marking a new low since 1992, reflecting characteristic signs of balance sheet contraction. Corporate debt growth remained below 10%—a stark contrast to the 10%+ growth rates observed from 2000 to 2017 (with peaks above 30%)—further suggesting a “lying flat” posture among firms. On the other hand, the macro leverage ratio rose by 10.4 percentage points from 262.8% at the end of 2021 to 273.2%, surpassing the level recorded at the end of 2020.

The key to resolving this apparent paradox lies in the significant slowdown in economic growth. In 2022, real GDP grew by only 3.0%, while nominal GDP expanded by just 5.3%—the second-lowest nominal growth rate since 1990, exceeded only by the 2020 level.

Government leverage continued to rise, increasing by 3.6 percentage points from 46.8% at the end of 2021 to 50.4%, exceeding prior expectations. Actual new government borrowing surpassed the official quota, reflecting a proactive fiscal stance within a constrained budgetary framework.

Looking ahead to 2023, the macro leverage ratio is expected to continue rising, albeit at a slower pace than in 2022. Assuming GDP growth of 5.5%, the leverage ratio is projected to increase by approximately 5.5 percentage points—roughly half the increase observed in the previous year.

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