Deleveraging is a key priority of economic work for the Chinese government and identified as a key indicator for evaluating supply-side structural reforms and financial risk. Recently (August 2017), IMF Article IV Consultation Staff Report issued a warning against China’s debt surge based on its leverage ratio. Growing domestic and international concerns with China’s deleveraging prompted us to publish reports more frequently and closely follow changing leverage ratio.

According our analysis, China should proactively and prudently follow a “three-step” strategy in its deleveraging process: firstly, slow down the growth of leverage ratio; secondly, stabilize leverage ratio; and thirdly, reduce leverage ratio. Currently, China is in the second stage: overall leverage ratio remains relatively stable with improving the structure of sectoral leverage ratios, resulting in falling risks. Hence, we stress that in discussing China’s debt (leverage) risks, conclusions drawn solely based on overall leverage ratio without recognizing structural improvement are biased.

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