China is leveraging up


While the rest of the world is going through a deleveraging process, China has been leveraging up. Its economy is getting bubbly.

According to research by Standard Chartered Bank, China’s overall leverage ratio (the sum of the leverage of government, corporate and household) now reached 210% of GDP, rising from a rather high level 150% of GDP in early 2000s.

China overall leverage

Dividing the overall leverage ratio in into three sub-components, we see the biggest increase came from the corporate sector: the ratio in that sector has increased from 80% of GDP at the beginning of the Great Recession to around 130% of GDP today.

China leverage decomposition

Most of the leveraged-up corporations are SOEs.  They are the natural candidates to respond quickly to government’s  call for stimulus spending in the aftermath of the financial crisis during 2007-2009.

Besides SOEs, local governments also created all sorts of firms outside of government’s (and bank’s) balance sheet, the so-called local-government-investment-vehicles, or LGIVs.   This is Chinese version of shadow banking system. My sense is that they have contributed a great deal to China’s housing bubble.