China’s Leverage Falls As Households and Firms Cut Borrowing

China’s debt-to-GDP ratio fell in the second quarter for the first time since 2022, even as the government kept borrowing while households and private companies pulled back under the weight of falling home prices, sluggish income growth and shrinking profit margins, according to a new report.

The ratio slipped 1.1 percentage points to 308.2 per cent, the National Institution for Finance and Development (NIFD), a Beijing-based think tank, said in a quarterly report on Thursday.

The ratio compares debt with the size of the economy, measured by nominal gross domestic product growth. China’s second-quarter nominal GDP grew by 5.9 per cent.

The report, however, warned that the headline debt level improvement masked continued balance-sheet contraction in the private sector, with households paying down debt and many private firms still reluctant to borrow or invest.

Households had been cutting debt since mid-2024, with their debt-to-GDP ratio falling a further 1.3 percentage points to 57.7 per cent, according to the report. Mortgage lending shrank for a 13th straight quarter, while the decline in consumer lending accelerated to 1.8 per cent from 0.2 per cent in the first quarter, as sliding home prices and sluggish income growth curbed borrowing. The report pushed back against the view that household balance sheets were recovering by stopping borrowing to accumulate net assets, saying household credit was “not just lying flat, but shrinking”.

It attributed the weak income growth to what it called a “jobless boom”, in which AI-driven investment by technology giants boosted growth without translating into stronger employment or household incomes, echoing concerns over China’s increasingly K-shaped economy.

Private companies pulled back further, with investment falling 8.5 per cent year on year. Nearly 60 per cent of listed private firms reduced their debt-to-asset ratios during the quarter, while about 30 per cent cut fixed-asset investment.

The report said private manufacturers, concentrated in mid- and downstream sectors, were squeezed as factory-gate prices outpaced consumer prices by 3.1 percentage points in June, the widest gap since July 2022. That left many firms with higher revenues but weaker profit margins, further discouraging investment.

Corporate debt still grew 7.8 per cent year on year, with bond issuance – a funding channel largely limited to larger, highly rated firms – rather than bank loans accounting for most of the increase.

The government was the only sector where leverage rose. Its debt-to-GDP ratio climbed 0.7 percentage points to 71 per cent, with borrowing up 13.5 per cent year on year. The increase came almost entirely from the central government, whose ratio climbed to 30.5 per cent from 29.9 per cent, while local government leverage remained flat at 40.4 percent.

The report came as the Politburo, the Communist Party’s top decision-making body, pledged to step up macroeconomic policy support and accelerate fiscal spending in the second half of the year after economic growth lost momentum. Real GDP growth slowed to 4.3 per cent year on year in the second quarter from 5 per cent in the first, even as nominal GDP growth accelerated.

“Whether better inflation expectations and faster nominal growth can be sustained depends on the repair of private-sector balance sheets and on the government taking on more debt,” the report said.