A shift to the higher quality economy over a sheer growth rate is among the most pivotal changes in the coming years, and stemming the high leverage rates at the government, enterprise and even household levels will be a crucial mission as China gets serious about paring down credit levels that could undermine financial stability. 

Financial deleveraging is a multiyear campaign, but perhaps 2018 will be the year people remember as the year stark actions and true commitment was shown by authorities to crack down on cheap credit allocated to support asset prices or state-owned enterprises. 

The focus on deleveraging will be on cutting down on loose credit in local government financing and highly leveraged companies, especially in real estate. The campaign is a prerequisite in transforming into an economy that is oriented towards quality growth and to complete an industrial upgrade, and though it will come with growing pains. Even so, China has designated the financial deleveraging drive, aimed towards preventing systemic risk that would wreak havoc on the entire economy, along with  poverty alleviation and curbing pollution as the top priorities for the coming three years, as was reinstated by the state’s economic advisor and newly-appointed vice premier Liu He at Davos this year. 

Debt piles accumulated over the years by local governments, land developers and conglomerate looking to expand their reach and reputation overseas with extravagant shopping sprees will pose a significant risk, and defaults threaten a spill-over or even domino effect to ripple throughout the economy, a fact of which central authorities are fully aware. It is now time to turn off, or at least turn down the flow of which funds and securities companies have been flourishing. 

China’s former central bank governor Zhou Xiaochuan made headlines last year on the sidelines of the Party Congress, warning against a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of debt-fueled growth. 

Resolve has also been shown in pushing to rein in the shadow banking sector, with the growth of trillions of yuan worth of debt-based products marketed as wealth management plans slowing significantly since late last year. 

The off-balance sheet financing such as trust loans and bankers acceptance loans has nearly stood at a standstill compared to their burgeoning growth seen over the last few years, falling to 107 billion yuan in October last year, from 396 billion yuan in September.

Guidelines from the China Banking Regulatory Commission published at the end of last year are striving to deter banks from referring their clients to invest in trust products through a channel business, which has taken off in the past decades as commercial banks chase higher yields by disguising loans from their balance sheets, forming contracts with non-bank financial institutions to channel funds into investments that are more lucrative and prove riskier. 

Shadow banking may be the bulk of where leverage lies, but regulators have also grown increasingly wary of illicit financing that has risen in hand with bubbles and risks being among the first nations to blow a whistle on initial coin offerings, banning token sales that often become grounds for risky fundraising, and further proceeded to shut down all exchanges and may move on to pose restrictions to bitcoin mining as the digital currency brings, not just in the speculative frenzy over its value, but to shield the average investor from investing funds in projects with poor disclosure and high risk of default.

On the household and individual level, leverage has also been pushed beyond the conventional boundaries for the nation with deep-seated saving habits a property boom forcing the majority to stretch their credit to the limits to purchase prohibitively expensive assets. Microlending firms, or payday loans, mushroomed – small loans requiring little or no collateral with abnormally high-interest rates and extreme debt collection practices, and loose regulation have allowed them to proliferate.

New rules in December last year stipulated that only licensed firms could conduct such business—and just to individuals with income, without misleading them to over-borrow.  

The drive to contain risks and to keep the sector under guidance by regulators may have only just begun, with the recent merging of the banking and insurance regulators, a part of the institutional reform unveiled during the National Party Congress this month. This move is aimed at plugging in loopholes and blind spots that fall in grey areas between the jurisdictions of the two bodies and increase scrutiny as the lines blur and as with both banks and insurance firms crossing over.