In the third quarter of 2021, the macro leverage ratio continued to decline, falling by 0.6 percentage points. This brought the cumulative decline over the first three quarters to 5.3 percentage points. Against the backdrop of weaker-than-expected economic growth, subdued debt expansion was the primary driver of the leverage ratio decline in Q3.

By sector, the household leverage ratio remained broadly stable, rising by 0.1 percentage points in Q3 and falling by 0.1 percentage points over the first three quarters. The share of personal business loans in total household debt continued to rise. The leverage ratio of the non-financial corporate sector declined by 1.6 percentage points in Q3 and by 5.1 percentage points cumulatively over the first three quarters, marking five consecutive quarters of decline. The government sector leverage ratio rose by 0.9 percentage points in Q3 but still registered a cumulative decline of 0.1 percentage points through Q3. Full-year new government debt is expected to fall short of the budget deficit.

Changes in the composition of household debt partially reflect the improved financial support for the real economy. As activity in the real estate market declined, the contribution of residential mortgage lending to household leverage weakened. In contrast, the expansion of inclusive finance drove robust growth in household business loans, becoming the main force behind the slight increase in household leverage.

Although China achieved a “beautiful deleveraging” in the first half of the year, the structural concerns flagged in the Q2 report began to materialize in Q3. The recovery of the real economy lost steam, and corporate investment appetite remained weak. Rising debt risks among property developers led to a slowdown in real estate investment. Tighter eligibility criteria for the issuance of local government special bonds dampened infrastructure investment growth.

Meanwhile, central government revenue exceeded expectations, and treasury cash holdings remained ample. Given constraints on debt-financed government spending and limited willingness to borrow, the full-year increase in government debt may fall short of the annual budgeted deficit. It is recommended that, while maintaining structural policy orientation, moderate macro-level easing be considered to realize potential economic growth and mitigate macro-financial risks.

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