In the third quarter of 2022, China’s macro leverage ratio rose from 273.1% at the end of Q2 to 273.9%, an increase of 0.8 percentage points. This brought the cumulative rise over the first three quarters to 10.1 percentage points. The stabilization of economic activity was the main factor behind the relatively stable macro leverage ratio in Q3. If economic growth remains steady, the leverage ratio is expected to remain broadly stable (or even decline slightly) in Q4, with a full-year increase of around 10 percentage points—consistent with earlier projections.

Loan growth in both the household and non-financial corporate sectors remained at historically low levels. The household saving rate continued to rise, while private enterprises exhibited weak investment appetite. As a result, the private sector has become increasingly conservative in debt accumulation. The full-year quota for local government debt issuance was largely exhausted in the first half of the year, leading to a 0.3 percentage point decline in the local government leverage ratio in Q3. The accelerated issuance of special-purpose bonds supported a rebound in infrastructure investment, but the sharp decline in land transfer revenues suggests that local governments will continue to face significant fiscal pressures in the near term.

Attention should be paid to the potential downturn following the peak of the financial cycle. As the financial cycle peaks and begins to contract, the effectiveness of conventional counter-cyclical macroeconomic policies tends to weaken. In the short term, stronger policy efforts are recommended to restore market confidence. Over the longer term, efforts should focus on “structural deleveraging” to facilitate the orderly resolution of excess debt and overcapacity.

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