In the first quarter of 2022, China’s macro leverage ratio rose from 263.8% at the end of 2021 to 268.2%, marking an increase of 4.4 percentage points—a significant upward shift. The pandemic remained the most prominent source of uncertainty, contributing to heightened downward pressure on the economy. Scenario projections based on varying economic growth rates suggest that the macro leverage ratio could rise considerably in 2022, potentially by more than 10 percentage points under adverse scenarios.

The leverage ratio of the non-financial corporate sector rebounded sharply, increasing by 4.1 percentage points in Q1. However, this uptick has not fundamentally alleviated the risk of a balance sheet recession, as corporate investment and financing sentiment remains weak. The rise in corporate leverage was primarily driven by a surge in low-interest bill financing, while the growth rate of long-term corporate loans continued to decline.

Both the room for and the efficacy of monetary policy have encountered increasing constraints, underscoring the need for a more proactive fiscal policy stance. Since 1998, China has undertaken seven instances of budget deficit expansion or issuance of special treasury bonds. Under the precondition of manageable risks, there is now a case for expanding government bond issuance to fully leverage the structural and targeted advantages of fiscal policy, in support of the central government’s strategic emphasis on strengthening infrastructure investment and stabilizing economic growth.

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