Summary of Key Points
In the second quarter of 2026, China's macro leverage ratio (debt level / nominal GDP) decreased by 1.1 percentage points for the first time in over four and a half years. However, this does not indicate an overall improvement in the economy: The household sector has been actively reducing its debt due to falling housing prices and low incomes (mortgage loans have shown negative growth for 13 consecutive quarters), while private enterprises have been forced to reduce their debt due to rising costs from suppliers and weak demand from consumers. Only the government sector has been moderately increasing its leverage to counter these pressures. To stabilize the economy in the future, it is crucial to repair the balance sheets of households and private enterprises, while the government continues to optimize the leverage structure.
1. First Decline in Macro Leverage Ratio: Mainly Due to an Increase in Nominal GDP
The macro leverage ratio is calculated as "total debt ÷ nominal GDP." A decrease in this ratio can be achieved either by increasing the denominator (nominal GDP) or decreasing the numerator (debt). The recent decline was mainly due to an increase in the denominator:
- Nominal GDP grew by 5.9% year-on-year in the second quarter (1 percentage point higher than in the first quarter), with moderate inflation playing a significant role (the GDP deflator turned positive for the first time in three years). For example, the PPI (price of raw materials) increased from -0.6% in the first quarter to 3.6% in the second quarter, mainly driven by rising oil prices, which pushed up overall price levels.
- Although the leverage ratio has decreased, the debt of households and enterprises is actually shrinking, indicating that the economy has not fully recovered.
2. Continuous Debt Reduction by Households
The household sector's leverage ratio decreased by 1.3 percentage points, as a result of active debt reduction:
- Negative Growth in Mortgage Loans for 13 Consecutive Quarters: Housing prices continue to fall, so people are hesitant to take out mortgages to buy homes. There have even been cases of "zero-mortgage home purchases" where buyers use their savings instead of loans to purchase small-sized second-hand homes in core cities.
- Expansion in the Decline of Consumer Loans: The growth rate of consumer loans fell from -0.2% in the first quarter to -1.8%. This is due to two factors: falling housing prices, which have reduced household assets and made people more cautious with spending; and low income growth, leaving them with less money for consumption.
- Some argue that households' net assets are increasing, but the report disagrees. This is because savings have increased by 14.6 trillion yuan (2025), while loans have only increased by 0.44 trillion yuan. This is a passive balance resulting from people's reluctance to spend and borrow, not a true sign of improving balance sheets.
3. Debt Reduction by Private Enterprises
The corporate sector's leverage ratio decreased by 0.5 percentage points, with private enterprises being the main drivers of this reduction:
- Change in Financing Methods: Bond financing has replaced bank loans as the primary source of funding for private enterprises. However, private enterprises are receiving less money; 59.9% of them have seen a decrease in their leverage ratios, and nearly 30% are not investing (with negative fixed asset expansion rates).
- Earnings Pressure: The PPI-CPI gap has widened to 3.1%, meaning the cost of raw materials is rising faster than the prices of final products. Private enterprises, which are often located in the mid-to-lower parts of the supply chain, face higher costs for raw materials and cannot pass on these increases to consumers due to weak demand, resulting in reduced profits and forced debt reduction.
4. Government's Moderate Increase in Leverage: A Stabilizer to Counter Microeconomic Shrinkage
The government sector's leverage ratio increased by 0.7 percentage points as a result of proactive measures:
- Effect: With households and enterprises both reducing their leverage, the government's increased leverage can boost investments in infrastructure and other areas, helping to stabilize the economy. For example, special bonds and policy-based financial instruments may be issued more frequently in the second half of the year, which should support infrastructure investment.
- Future Directions: The government aims to optimize the debt structure between the central and local governments and improve the efficiency of fiscal spending by ensuring that funds are used effectively.
5. How to Move Forward?
The report outlines three key recommendations:
1. Help Households Stabilize Their Leverage: Increase household incomes through various channels (such as fiscal transfers and social security improvements) and reduce the burden of housing costs (by lowering mortgage rates and selling surplus housing).
2. Revitalize Private Enterprises: Implement the "Private Economy Promotion Law" to address issues related to rising costs and encourage investment.
3. Optimize Government Leverage: Balance central and local government debt levels and improve the effectiveness of fiscal spending.
Analysts predict that the macro leverage ratio will remain stable in the second half of the year. As long as the balance sheets of households and private enterprises gradually improve, the economy can grow more healthily.
(The entire report is explained in plain language to make financial concepts accessible to a wide audience.)