(Yicai Global) July 26 – Although China's debt growth fell in the second quarter to its lowest point since 2000, the country's macro leverage ratio continued to rise due to slowing economic growth, according to a report by a state-backed think tank.

The ratio of debt to gross domestic product jumped by 10.7 percentage points to 283.8 percent as of June 30 from Dec. 31, 2022, according to a report released by an institution under the Chinese Academy of Social Sciences. The second quarter made up 2.1 points of the increase.

This year, the macro leverage ratio is predicted to move up by more than 11 percentage points. The think tank expects the ratio to rise by 2 to 2.5 points during the ongoing quarter and then fall by 2 points in the fourth quarter.

Slowing Debt Growth

The addition to the macro leverage ratio was smaller in the second quarter because real economy debt expanded slower, said Liu Lei, secretary-general of the institution that published the report.

China's cumulative debt, including household, corporate, and government borrowing, reached CNY351.5 trillion (USD49.1 trillion) as of June 30, up by only 9.3 percent from a year earlier, the lowest growth rate since 2000. 

However, at the same time, tamed economic growth kept the leverage ratio high, Liu said. China’s GDP, which includes all produced goods and services, increased by 6.3 percent in the second quarter from a year earlier. Still, the numbers are heavily impacted by the base effects of the Covid-19 pandemic and recovery as during the past two years, the average GDP growth in the second quarter has been 3.3 percent. 

Residents were borrowing more cautiously as their leverage ratio merely rose by 0.2 percentage points in the second quarter to 63.5 percent while in the first six months of this year, the ratio climbed by 1.6 points, based on the report.

The leverage ratio of non-financial enterprises increased by 6.9 percentage points to 167.8 percent in the first half whereas the government’s corresponding ratio rose by 2.2 percentage points to 52.6 percent.

Since the third quarter of 2020, the indebtedness ratio of residents had been fluctuating around 62 percent until it edged up by 1.4 percentage points in the first quarter, but stabilized again in the second quarter. The sluggish real estate market is the main reason for the slowly rising residential debt, Liu said.

If the interest rates of existing mortgages are lowered as expected, residents might become more willing to consume and invest, according to Ming Ming, chief economist of Citic Securities.

Editors: Tang Shihua, Emmi Laine