Grasping Shadows: The Politics of China’s Deleveraging Campaign

China is currently facing a long-term, structural economic slowdown and rising risks of a financial crisis. Trustee Chair senior associate (non-resident) and partner at the Rhodium Group Logan Wright argues that the deleveraging campaign that China’s leadership launched in 2016 to reduce systemic financial risks is the only logical starting point to explain how China’s structural economic slowdown began. By reducing the growth of the “shadow” or informal banking system, China’s financial authorities cut credit growth in half and made it far more difficult for Beijing to power the economy using its traditional tools of credit-fueled investment by state-owned enterprises and local governments. Over the course of the deleveraging campaign, property developers continued expanding their own borrowing, which inflated an unprecedented real estate bubble even larger before it finally burst in late 2021. The deleveraging campaign marked the end point of China’s unprecedented credit expansion after the global financial crisis.

This report aims to objectively and comprehensively analyze the economic and political consequences of China’s deleveraging campaign, which are closely related to China’s current economic slowdown. The deleveraging campaign is an important test case of the adaptability and flexibility of the Chinese state to respond to meaningful economic challenges, such as the growth of the shadow banking system. The rising risks within China’s economy and financial system also raise new policy questions for the United States in the context of rising systemic competition.

This report is made possible by generous support from the Smith Richardson Foundation.

Logan Wright
Senior Associate (Non-resident), Trustee Chair in Chinese Business and Economics