In the second quarter of 2022, China’s macro leverage ratio rose from 268.2% at the end of Q1 to 273.1%, an increase of 4.9 percentage points. This brought the cumulative rise in the first half of the year to 9.3 percentage points. The primary driver of this increase was weaker-than-expected economic growth.

By the end of the first half of 2022, the macro leverage ratio stood at 273.1%, up by 9.3 percentage points from the end of 2021. Among the contributing sectors, the household sector accounted for 1% of the increase, the non-financial corporate sector for 70%, and the government sector for 29%. In terms of debt growth by sector, private sector leverage expansion remained well below peak levels—and in some cases, near historical lows—whereas government borrowing was more expansionary. This highlights the need for vigilance against the risk of a balance sheet recession in the private sector.

Scenario analyses indicate that if actual GDP growth reaches 4% for the year, then even with an additional RMB 1 trillion in government debt issuance in the second half—on top of the annual quota—the macro leverage ratio would remain around 273%. If GDP growth reaches only 3.5%, such additional borrowing would raise the leverage ratio by approximately 1.2 percentage points in H2. On the other hand, if the economy performs significantly better—achieving 5.5% growth for the full year—the macro leverage ratio could decline by around 3 percentage points in the second half. This “high early, stable later” trajectory in leverage dynamics has provided the government sector with greater confidence to pursue additional policy support.

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