(Yicai Global) July 27 -- China’s macro leverage ratio, or total debt as a share of gross domestic product, has narrowed for three quarters in a row as the world’s second-largest economy expands, according to a Chinese government think tank.

The MLR fell 2.6 percent to 265.4 in the second quarter of this year from the end of the first quarter, the National Institution for Finance and Development said in a report yesterday. It is now 5.8 percentage points below the record 271.3 set in the third quarter of last year.

The ratio mainly narrowed in the non-financial corporate sector, falling to 158.8 from 161.4 in the first three months of 2021 for a fourth straight quarterly decline. Household and government leverage ratios were stable, with the latter recording a 0.1 point gain, per the report.

The main reason for the second-quarter drop is faster economic activity, Liu Lei, a senior researcher at the NIFD, was cited as saying. On one the hand, the economy’s debt growth has basically returned to normal; on the other, nominal GDP growth has remained at a relatively high level, contributing to the deleveraging.

The MLR will remain stable with a modest decline in the second half of the year, Liu and other industry insiders predicted.

Businesses are unwilling to increase investment once they make a profit, and instead prioritize paying off debt and reducing the amount of new borrowing, the report said. As a result, the corporate sector’s leverage ratio narrows, contributing to China’s overall deleveraging. But if firms continue to do that, they could trigger a balance sheet recession, it cautioned.

Editors: Zhang Yushuo, Futura Costaglione