Title:Governance of Macroeconomic Leverage and Its Potential Impact on Economic Development

The Central Financial Work Conference，held in Beijing this October，called for the establishment of a long-term mechanism to prevent and defuse local debt risks，the creation of the government debt management   compatible with high-quality development，and the optimization of the debt structure of both central and local governments. Currently，China's overall leverage ratio stands at 297.2%，the highest among global emerging markets and continues to show a rising trend. The accommodative financing conditions of the past two decades have stimulated the expansion of infrastructure and logistics construction. This has contributed to the remarkable growth of China's economy，raised the living standards of domestic households，and led to the inevitable escalation of the macro-leverage ratio. Debt leverage is a double-edged sword. On the positive side，debt is the accelerator of the booming economy. However，rising debt too high or too fast will make future economic operation vulnerability and pose potential risks to financial stability. Debt governance needs to be adapted to the rhythm of domestic economy. In times of economic downturn，the continuation of unlimited debt expansion is both ill-advised and risky. During periods of economic downturn，sectors with high debt leverage are susceptible to liquidity risk. Policymakers should remain cognizant of the heightened risks posed by escalating debt and leverage ratios.

China's Macro Leverage Ratio Continues to Rise

The Chinese government has demonstrated remarkable success in promoting economic growth over the past 20 years，beginning in 2002. Key strategies used in this impressive achievement were strong and effective governance，effective countercyclical policy adjustments and proper debt management. As the economy shift from a high-speed mode to the "new normal"，the unproductive and unviable zombie firms would exit the market，allowing healthy firms to operate more efficiently，while promoting the entry of new productive firms. But the debt of the zombie firms that should have exited still exists，especially for the zombie ones，due to the improper intervention of local governments. These debt-driven challenges are closely linked to a major finance-intensive industry. That is，the real estate development industry was characterized by high turnover，high debt and high leverage. The resulting debt risks in this sector have become a giant obstacle for the ambitious de-risk arrangement.