Structural Deleveraging: Evidence from China

Using province-level data in China for the period of 1999-2015,we examine the mechanisms through which sectoral differences in leverage ratio and productivity affect macro leverage ratios.The state-owned sector undertakes a large number of public services and plays an irreplaceable role in solving market failures and providing public goods.However,in the case of information asymmetry and incentive incompatibility,these policy burdens affect the leverage optimization and productivity improvement of the state-owned sector.From the perspective of sectoral differences,we therefore decompose the change in macro leverage ratio into leverage ratio structure effect and productivity structure effect,and then substantiate the impact mechanisms of these two effects on macro leverage ratios.Overall,our conclusions provide theoretical support and empirical evidence for structural deleveraging in China.

China’s Systemic Financial Risk:Basic Dimensions,Key Areas,and Evolving Trends

The COVID-19 pandemic,the regulation of real estate,and external uncertainties are the core variables in the recent evolution of China’s financial risks,and overall planning and structural deployment are the key guarantees for China’s financial stability.From an aggregate perspective,China’s systemic financial risk tended to ease overall in 2021,but remained high.The risk profile of China’s financial system in 2021 presented five important features.First,the macro leverage ratio fell slightly,but exposed the hidden dangers of balance sheet recession.Second,there was a certain blockage in the transmission of financial system liquidity to the real economy.Third,the fragility of the financial system was further exposed,the bond default balance reached a new high,the structural differentiation of bonds between state-owned and private enterprises became prominent,and private enterprise default became more serious.Fourth,the contagion effect of domestic cross-market financial risks remained significant.Fifth,the international political and economic situation was volatile,and spillover effects such as the rising prices of raw materials,the inauguration of a new US administration,and the shift of the Federal Reserve’s monetary policy were significantly strengthened.In terms of key risk areas,the risks of the real estate market,hidden government debt,and small-and medium-sized domestic banks were quite prominent.In 2022,pandemic prevention and control,economic recovery,and structural upgrading will remain the main themes of China’s development.China’s financial risks are generally under control,but the country will still face major risks such as a high macro leverage ratio,tight market liquidity,increasing debt vulnerability,significant spillover effects,and rising volatility in the international market.