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China Deleveraging: Domestic and Global Impacts

A multi-year path to reducing financial risk & improving credit allocation.

Key Insights

  • Deleveraging returned in 2021 as a key focus of China’s economic policy, with a multiyear strategic aim of controlling the debt‑to‑GDP ratio.
  • For China, deleveraging means a period of slower economic growth and larger external surpluses, with short‑term costs followed by lower but higher‑quality growth.
  • For the rest of the world, China deleveraging means fewer growth opportunities. It is unlikely that China will drive another commodity “supercycle,” for example.

China’s focus on deleveraging began in earnest in 2017. After an interruption last year due to the pandemic, it returned in 2021 as a key focus of economic policy. We view China’s deleveraging campaign as a multiyear agenda with the strategic aim of controlling the country’s debt‑to‑gross domestic product (GDP) ratio. It marks a sea change of policy by the Xi Jinping administration that will impact the Chinese domestic economy and financial markets significantly in the years ahead. It is also a relevant theme for international investors given the importance of China to the global economy, with a broad potential to impact asset classes and regions, especially in Asia.  

In this Insights, we look at the origins of China’s debt issues, why Beijing came to regard deleveraging as a critical objective to be pursued even at the cost of lower economic growth, and assess the progress that is being made. In analyzing deleveraging, we focus both on the financial system, such as the commercial banks and shadow banking, and on end borrowers, particularly government‑related entities (GREs) such as state‑owned enterprises (SOEs) and local government financial vehicles (LGFVs).  

Text BoxAmong private sector borrowers, we consider the property sector, which came under the spotlight following liquidity problems and financial stresses at several highly leveraged residential developers that led to several defaults in the offshore USD bond market. Having examined the impact of deleveraging on China’s financial system, we briefly consider its macroeconomic implications, such as slower growth, higher domestic savings, and larger external surpluses.

See the full report (PDF).


This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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