What is Deleveraging?

"Leverage" refers to debt management. "Leverage ratio" refers to debt ratio. "Deleverage" refers to avoiding corporate debt operations or minimizing corporate debt ratio. "Deleveraging" refers to using equity financing instead of debt financing. As the leading and even the only way for corporate financing. Deleveraging is a necessary measure to prevent the financial crisis. The global financial crisis explained that the transition from indirect investment and financing to direct investment and financing was the main method and even the only way to gradually replace debt financing with equity financing. It is the logic of financial development and the logic of economic development. ^[1]

Deleveraging

"Leverage" refers to debt management. "Leverage ratio" refers to debt ratio. "Deleverage" refers to avoiding corporate debt operations or minimizing corporate debt ratio. "Deleveraging" refers to using equity financing instead of debt financing. As the leading and even the only way for corporate financing. ^[1]

Deleveraging is a necessary measure to prevent the financial crisis. The global financial crisis explained that the transition from indirect investment and financing to direct investment and financing was the main method and even the only way to gradually replace debt financing with equity financing. It is the logic of financial development and the logic of economic development. ^[1]

"De-leveraging" means a reduction in financial institutions or financial markets

When the capital market is improving, the high returns brought by the high leverage model make people ignore the existence of high risks. When the capital market begins to decline, the negative effects of the leverage effect begin to stand out and the risks are rapidly amplified. For businesses and institutions with excessive leverage,

At present, the most common risk term in the world is "debt". In essence, debt is actually an overdraft of credit. The excessive overdraft of credit formed by abuse of credit will cause debt risk and eventually lead to a debt crisis. From a balance sheet perspective, business cycle fluctuations are often reflected in the adjustment of the leverage of the economic system. There are often three stages of deleveraging: early recession, private sector deleveraging, economic recovery, and public sector deleveraging.

During the early recession period, the private sector debt ratio climbed to a high point, and public sector debt began to rise. This phase probably lasts 1-2 years; in the second phase, the private sector deleveraging phase. The private sector's cash flow has increased and the economy has picked up, but due to the implementation of fiscal stimulus policies, the public sector debt ratio has reached a stage high. This phase lasts about 3-4 years; in the third phase, the public sector deleveraging phase.

Despite a rebound in gross domestic product (GDP) and a rise in the overall social debt ratio, the public sector has had to start a long process of deleveraging. This phase lasts about 10 years.

At present, the developed countries of the world are in a period of transition from the second phase to the third phase. Entering the third stage means that the era of cheap capital is about to go away, and investors and borrowers will face the dilemma of rising borrowing costs. In the next few years, the superimposed effects of credit tightening, fiscal tightening, and consumer tightening will become more apparent.

Impact of various stages on the Chinese economy

At every stage of "de-leveraging", the impact on China's economy is different.

First, the "deleveraging of financial products" has had a small impact on China.

Due to capital account controls, the vast majority of China's foreign financial investments are made in the form of central bank foreign exchange reserve investments. This type of investment has always been stable and conservative, and will basically not be involved in highly leveraged financial products. Even if there is a loss, it cannot be compared with the losses of other types of investors.
Secondly, the impact of "deleveraging of financial institutions" and "deleveraging of investors" on China is relatively small.

On the one hand, the degree of opening up of China's banking industry is limited. At the same time, foreign financial institutions' share in the Chinese market and their role in financial intermediation are very small. funds. In this way, when international financial institutions and investors deleverage, it will generally not have a significant negative effect on China. On this issue, the most severe impact on the Chinese economy is currently manifested in the process of reducing the size of its balance sheet by international commercial banks, and trade credit has also been affected.
In the near term, the biggest negative impact on China's economy comes from the deleveraging of consumers in the US and Europe. China's exports will be seriously threatened, which will cause chain problems such as domestic overcapacity, weak manufacturing investment, and unemployment among manufacturing workers.
In the medium to long term, the most serious threat to the Chinese economy comes from "deglobalization." Since China is one of the biggest beneficiaries of globalization, "deglobalization" will also make China one of its biggest victims.

Because it will fundamentally subvert the way China's economy grows, forcing China to rely on domestic consumption to drive economic growth. However, international experience and academic research show that when an economy's main driving force for growth comes from internal consumption, the sustainable growth rate of the economy will experience a significant structural slowdown.

What does "deleveraging" lead to? So how will deleveraging affect the current

The choice under "deleveraging"

So what are the countermeasures of investors in the face of "deleveraging"? Some institutional investors believe that in consideration of deleveraging, in the stage of deleveraging and centralized release, they should try to adhere to the "cash is king" attitude. If you want to choose stocks, you should also try to choose companies with sufficient cash and low asset leverage Because, they may be man-eating sharks in the future merger wave.

Other investors believe that it is necessary to pay attention to the possibility of medium and long-term inflation in some emerging regions after short-term deflation.

Of course, this is a consideration for a longer period. What is currently agreed is that asset prices will end the mighty rising wave and will fall into decline.