Leverage Cycle and High-Quality Economic Development of China: A Perspective of Collateral Structure

Business cycles often manifest as leverage cycles,with collateral and its structure playing a crucial role.China’s overreliance on real estate collateral and excessive credit expansion after the global financial crisis has brought significant systemic risks to the economy,leading to a debt overhang that has contributed to the continuous decline in China’s economic growth rate,undermining the high-quality development of the Chinese economy.In the long term,China needs to activate collateral based on future cash flows through the rule of law and institutional reforms and its bank system to promote high-quality economic development.In the short term,China should actively issue government bonds,expand the government bond market,optimize the bond structure,and use national bonds to replace real estate and its related assets,supporting financial institutions and other sectors with damaged balance sheets,buying time for China’s high-quality development.Increasing national bond issuance will also mitigate the shortage of safe assets facing China and the world,lay the foundation for a new monetary policy framework,and enhance better coordination between fiscal and monetary policies,helping China become a financial powerhouse.