Structural Deleveraging: Evidence from China

Abstract Using province‐level data in China for the period of 1999–2015, we examine the mechanisms through which sectoral differences in leverage ratio and productivity affect macro leverage ratios. The state‐owned sector undertakes a large number of public services and plays an irreplaceable role in solving market failures and providing public goods. However, in the case of information asymmetry and incentive incompatibility, these policy burdens affect the leverage optimization and productivity improvement of the state‐owned sector. From the perspective of sectoral differences, we therefore decompose the change in macro leverage ratio into leverage ratio structure effect and productivity structure effect, and then substantiate the impact mechanisms of these two effects on macro leverage ratios. Overall, our conclusions provide theoretical support and empirical evidence for structural deleveraging in China.