A Naïve View of Deleveraging

A near-universal view during 2017 was that Beijing was actively initiating a corporate deleveraging campaign, following through on its pledges to derisk the financial system. This sounded great on paper, and Wall Street analysts bought in hook, line, and sinker.


At the end of 2017, nearly every China advisory shop released an outlook for 2018 that predicted another year of ‘continued, tough deleveraging.’ The problem, of course, was that deleveraging had never actually begun. What analysts originally mistook for deleveraging was a crackdown on shadow investment products in the financial sector—a trend CBB data saw too but is a very different thing than cracking down on credit expansion more broadly.

Wall Street View

“Deleveraging started in late 2016. The gap between broad credit growth and M2—a measure for financial sector leverage—reduced significantly. Interest rates were up during this process: the credit-M2 gap is a good leading indicator for long term interest rates.”

Global investment bank

Street analysts confused broad “risk reduction” policies—such as regulatory moves that curtailed the issuance of shadow instruments like wealth management products—with “deleveraging.” They are not and have never been the same thing.

CBB Forecast

Across numerous metrics, China Beige Book data laid waste to the idea that the government was enforcing a deleveraging of the corporate sector, or that corporates were actually borrowing less. By the end of 2017 company borrowing had rebounded—surging far above the lows of 2016.

Source: CBB Data Platform


Official data ultimately also showed no signs of an economy-wide reduction in debt. Not only did loan growth continually outrun GDP growth, but it accelerated throughout 2018 and 2019. It was clear investors had misunderstood the limits of China’s “deleveraging” campaign, which never forced a clamp-down on overall credit access, at least in any sustained way. In any case, by the end of 2019 Beijing had reversed even these lighter measures, fully turning back on the credit spigots as the US-China trade war escalated.

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