(Yicai) July 31 -- China’s debt-to-gross domestic product ratio fell in the second quarter for the first time in four and a half years, mainly as a result of GDP growth.

The macro leverage ratio shrank to 308.2 percent in the three months ended June 30 from 309.3 percent in the previous quarter, according to a report released yesterday by the National Institute of Finance and Development. That was the first quarterly decline in the debt-to-GDP measure since the first quarter of 2022.

Mild inflation lifted nominal GDP by 5.9 percent from a year earlier, widening the gap with real GDP growth to 1.6 percent, the report said.

Theoretically, the macro leverage ratio reflects the relative strength of credit expansion, said Liao Bo, chief macroeconomic analyst at Northeast Securities. The second-quarter decline was mainly driven by rapid nominal GDP expansion, which stemmed from a pickup in broad price levels, he pointed out.

The producer price index fell 0.6 percent in the first quarter from a year ago, but then jumped 3.6 percent in the second quarter, with higher priced crude oil imports serving as the main driver of that turnaround.

However, the NIFD cautioned that while higher nominal GDP growth eased passive upward pressure on the macro leverage ratio, household and business balance sheets generally tended toward deleveraging.

Household debt registered a steeper decline amid mounting pressure on consumer credit, corporate debt growth lingered at historically low levels, and weaker earnings expectations prompted private enterprises to speed up deleveraging, the report noted.

Even though household net worth increased, the NIFD argued that this does not equal an ongoing repair of household balance sheets. In fact, rising net worth is merely a supplementary reference rather than a core indicator for judging balance sheet repairs.

Last year, household deposits rose by CNY14.64 trillion (USD2.16 trillion), while household loans inched up only CNY441.7 billion (USD65.4 billion), a dynamic that naturally lifts net worth. But it is merely a passive low-level equilibrium instead of an active balance sheet rehabilitation process, according to the report.

Private Firms Pare Debt Further

Corporate bond financing became the primary method of leveraging in the second quarter, it said, while subdued earnings expectations and weak investment confidence pushed private businesses into stepping up deleveraging.

About 60 percent of listed private Chinese firms had narrower debt-to-asset ratios in the second quarter from the previous one, while nearly 30 percent had negative growth in fixed asset investment in the period. The figures point to broad balance sheet contraction across private businesses.

Looking ahead, mild price gains in the second quarter lifted nominal economic growth, and the GDP deflator turned positive for the first time in nearly three years, helping contain a passive increase in the macro leverage ratio, according to the NIFD. While energy supply shocks can raise prices in the short run, sustained improved inflation expectations and stronger nominal growth hinge on balance sheet repair and a greater willingness by the government sector to take on additional leverage.

The macro leverage ratio will likely stabilize going forward, Liao predicted. The issuance of special-purpose government bonds slowed in the second quarter from a year earlier, but direct financing is expected to pick up in the second half, backed by government bond sales and new policy-based financial tools.

Given the economy’s strong first-quarter performance, he expects a moderate pullback in countercyclical policy adjustments to be normal and sees little reason for excessive pessimism regarding second-half infrastructure investment.

Editor: Futura Costaglione