Deleveraging China

COVID-19 and the Chinese economy: impacts, policy responses and implications

“…Liu (2021b) conducted a review on China's debt by sector and China's deleveraging strategies adopted since 2016, and concluded that some positive progress had been achieved as shown in Figure 2. Regarding non-financial corporate sector, Liu (2021b) argued that the fundamental causes of the rapid accumulation of Chinese non-financial corporate debts are China's financial repression, i.e., very low (controlled) interest rates, and its banking-centric (credit-driven) financing model. China's policy responses to COVID-19 including lowering lending rates and massive lending are exactly the drivers of debt accumulation.…”

“…China's policy responses to COVID-19 including lowering lending rates and massive lending are exactly the drivers of debt accumulation. Regarding financial corporate sector, Liu (2021b) found that a rate cut together with a lower reserve requirement ratio can accelerate the growth of China's intra-financial system debts. Also, a decline of real economy performance is significantly associated with the acceleration of intra-financial system debts growth.…”

“…These are exactly what have happened during the COVID-19 period. Regarding household sector, Liu (2021b) found that when the monetary policy is expansionary in the form of an RRR cut, a lending rate cut or expansionary broad credit (M2), the mortgage loans growth will accelerate. These are also what have happened during the COVID-19 period.…”

“…This is also happening in China (more detailed discussions in Part 3.2D). While Liu (2021b) concluded that China's government debt is generally not a big concern for investors and policy makers, the rising public sector debt also contributes to the rising debt level of the overall Chinese economy.…”

“…Second, how to further deleverage the post-COVID-19 China will be more challenging. Liu (2021b) argued that monetary policy does play a significant role in credit booms in various sectors. As the result, the Chinese authorities decided to align the growth of M2 and total social financing with the nominal GDP growth.…”