Timeline of China's Deleveraging Campaign


A stylized photo of The People's Bank Of China (PBOC) in Beijing, China.

China’s deleveraging campaign was the critical event that ended the country’s unprecedented post-crisis credit expansion.

The crackdown on “shadow” financing channels made China’s financial system safer in the short term, but it also slowed the economy substantially while creating new forms of credit risks.

The timeline below describes the campaign in four stages:

Stage 1

June 2013–March 2016

Experiments in Deleveraging

The initial expansion of shadow financing

Stage 2

May 2016–January 2018

The Deleveraging Campaign Begins

Significant monetary tightening steps to control informal credit

Stage 3

April–December 2018

Deleveraging Efforts Intensify

The creation of new regulatory frameworks

Stage 4

May 2019–May 2021

Consolidation and Fallout

The consequences of these measures for financial risks in China

Background of Deleveraging

The 2008 post-crisis stimulus effort led by local government investment was the landmark event that started China's unprecedented credit expansion.

Thousands of local government financing vehicles (LGFVs) were established and eventually became the key clients for shadow banks. The post-crisis stimulus effort triggered surging property prices and rising government debt, causing regulators to respond by trying to limit banks’ lending to these two sectors.

Shadow banking was born as a channel to bypass regulatory restrictions on lending and maintain credit to property developers and LGFVs. As the business grew, banks found other benefits to shadow banking, including reducing capital usage, boosting leverage, and concealing nonperforming assets.

Financial innovation was encouraged and wealth management products (WMPs) were considered a supplement to banks’ liability management given that deposit rates were fixed. Each financial regulator produced its own regulations to encourage the shadow banking business and boost asset growth.

Trusts, fund management companies, and brokerages became the “three musketeers” of the shadow banking business.

June 2012

Participant: China Securities Regulatory Commission (CSRC)
Event: Regulation

Regulators encourage expansion of shadow financing channels

Trial Measures for Fund Management Companies to Provide Asset Management Services for Specially Designated Clients

Measures for Securities Companies to Provide Asset Management Services for Clients

Throughout 2012, the CSRC issued a slew of regulations allowing fund management companies and brokerages to serve as channels for shadow banking business. The channel business for brokerages started shrinking in February 2014, and the fund management channel business started shrinking in November 2016. Trust companies became one of the most important channels for shadow banking activities.

March 2013

Participant: China Banking Regulatory Commission (CBRC)
Event: Circular

Wealth management products face first asset allocation restrictions

Notice on Relevant Issues Concerning Regulating the Investment Operations of Wealth Management Business of Commercial Banks

This was a key stage in the deleveraging process. Before Circular 8, banks invested funds raised via WMPs into shadow banking channels free of control. After Circular 8, funds raised via WMPs were still channeled to shadow banks but were capped at 35 percent of WMP proceeds. Banks increasingly used “purchases under resale agreements” to continue shadow banking investments after these regulations.

Stage One

Experiments in Deleveraging

The landmark event at this stage was the June 2013 interbank market crisis, when some banks defaulted on their repo transactions, short-term repo rates spiked to over 20 percent, and the world believed the Chinese financial system was collapsing.

The People’s Bank of China (PBOC) saw that the fast-growing WMP business was running out of control and tried to rein in its growth by tightening liquidity in the interbank market, resulting in the liquidity crunch. The PBOC failed and had to back off, which ended up kickstarting rapid growth of WMPs and shadow financing in the following years.

During the 2015 stock market rout, the chairman of the China Securities Finance Corporation said that WMPs provided over 3 trillion yuan in funding as the senior tranches of leveraged products speculating in the stock market.

Between 2013 and 2016, regulators experimented with their own versions of deleveraging efforts and policy swung between tightening and easing. In general, regulators became more concerned about shadow banking growth and started to tighten policy.

June 2013

Participant: PBOC
Event: Market

The PBOC forces the interbank market to the brink of collapse

Letter from the General Office of the People’s Bank of China Regarding Liquidity Management

The PBOC attempted to regulate banks’ WMPs and shadow banking business by squeezing the interbank market in June 2013. The effort backfired, short-term interest rates rose to 20-30 percent, and the PBOC was forced to reverse itself, which allowed shadow banking channels to grow.

December 2013

Participant: PBOC
Event: Regulatory Change

Banks are permitted to issue negotiable certificates of deposit (NCDs)

Growth in these instruments was very slow at first, but by 2017, NCDs became a key channel for banks to maintain interbank borrowing, replacing WMPs after additional regulations targeted WMPs.

February 2014

Participant: CSRC
Event: Regulation

Securities companies’ shadow banking activities face regulatory scrutiny

Supplementary Notice on Further Regulating the Asset Management Business of Securities Companies

These regulations severely curtailed brokerage houses’ channel business from banks, part of a series of actions to limit cooperation between banks and non-bank financial institutions.

April 2014

Participants: PBOC, CBRC, CSRC, China Insurance Regulatory Commission (CIRC), State Administration of Foreign Exchange (SAFE)
Event: Regulation

Regulations shift one form of shadow banking to another

Notice on Regulating Interbank Business of Financial Institutions

Circular 127 was a foundational regulation banning banks’ usage of repurchase agreements to conceal assets, which was a critical method for banks to grow their shadow asset books and reduce capital requirements. The net result of the circular was to shift shadow banking assets to “investment receivables” and other forms of non-loan assets.

January 2015

Participant: State Council
Event: Regulation

New budget law takes effect

The new budget law in 2015 was designed to ban local government borrowing through channels other than bonds. In response, local governments were able to lobby for larger swap bond programs to exchange their existing debt, and the new law generally did not prevent localities from borrowing through other channels. Local government debt continued expanding despite this attempt at fiscal discipline.

February 2015

Participant: CIRC
Event: Regulatory Change

Insurance companies enter shadow banking

The ceiling on interest rates for universal life insurance products was lifted. Insurers also started engaging in the shadow banking business by pooling money from retail investors through universal life insurance products and investing into the interbank market and the stock market. The rapid growth of these products also allowed some insurers to become far more aggressive in investing abroad.

June 2015

Participants: China Securities Finance Corporation, PBOC
Event: Market

China’s equity market bubble peaks, starting a major market rout

Highly leveraged margin trading funded via shadow banking was one of the critical forces behind the stock market bubble in 2015. The chair of the China Securities Finance Corporation estimated that 3.5 trillion yuan in WMP funds had helped to fuel the bubble. Beijing attempted to control margin lending, and the market collapsed. The China Securities Finance Corporation borrowed around 2 trillion yuan from the interbank market, and the PBOC was one of the primary vehicles of the stock market bailout. Equity valuations have not returned to 2015 levels since.

July 2015

Participants: PBOC and multiple agencies
Event: Regulation

Regulations encourage internet finance growth

Guiding Opinions on Promoting the Healthy Development of Internet Finance

These regulations encouraged the growth of internet financing, which later became a key target of the deleveraging campaign. The regulatory liberalization was designed to encourage some competition within the state-owned banking system.

October 2015

Participant: PBOC
Event: Monetary Policy Action

The PBOC formally liberalizes deposit rates

The PBOC removed the formal ceiling on deposit rates and floor on lending rates in October 2015, but in practice, a de facto ceiling on deposit rates remained in place, enforced through banks’ self-discipline system.

December 2015

Participant: CEWC
Event: Conference

Deleveraging discussed as a policy objective for the first time at the Central Economic Work Conference

The Central Economic Work Conference statement in 2015 was the first official mention of deleveraging. The meeting statement read: “The meeting noted that next year's socio-economic development, especially structural reform, will be a difficult task. Regarding strategy, [it was announced] China must maintain steady progress, and manage the pace and intensity of development. Tactically, China must prioritize key pain points, including focusing on cutting production overcapacity, reducing inventories, deleveraging, cutting costs, and mitigating shortcomings.”

February 2016

Participant: PBOC
Event: Monetary Policy Action

PBOC introduces a new macroprudential regulatory framework

The PBOC introduced its macro-prudential adjustment (MPA) mechanism, which was one pillar of its “two pillar” monetary policy framework. The framework was established primarily to control shadow banking activities and limit other systemic financial risks.

March 2016

Participant: CIRC
Event: Regulation

Regulators impose new limits on shadow banking activity from life insurers

Notice on Regulating Short and Medium Duration Life Insurance Products

CIRC started introducing limits on universal life insurance products used for shadow banking, which started to control their rapid growth.

Stage Two

The Deleveraging Campaign Begins, Focused on Monetary Tightening

A People's Daily interview with an “authoritative person” widely believed to be Liu He launched the deleveraging campaign with a discussion of China's high leverage ratios and warnings about debt, saying that “a tree cannot grow to the sky.”

The appearance of the article effectively ended the internal policy debates surrounding deleveraging and triggered more coordinated government efforts to reduce risks in the shadow banking sector. These started with monetary tightening steps in late 2016 and then expanded to regulatory tightening efforts in 2018.

May 2016

Participant: People’s Daily
Event: Government Meeting

People’s Daily Interview with an “authoritative person” launches deleveraging campaign

First Quarter Commencement of the [Deleveraging] Trend — An Authoritative Person Discusses the Current State of the Chinese Economy

The interview with an “authoritative person” in the People's Daily on May 9, 2016, was the formal announcement of the start of the deleveraging effort for both internal and external audiences. The interview was thought to be conducted with Liu He, the head of the office of the leadership group associated with economic and financial affairs at the time, or someone who effectively spoke for the viewpoint of Liu’s office.

July 2016

Participant: Politburo
Event: Government Meeting

Politburo affirms deleveraging goals

The Politburo’s statement from its economic work meeting for the second half of 2016 reaffirmed the importance of deleveraging as a fundamental reform of the financial system. The statement read, “The key to reducing overcapacity and deleveraging is to deepen the basic reform of state-owned enterprises and the financial sector.”

August 2016

Participant: PBOC
Event: Monetary Policy Action

Longer reverse repo transactions start monetary tightening effort

After six months, China's central bank reintroduced 14-day reverse repos on August 24, 2016, which triggered an adjustment in money market rates. The PBOC started guiding short-term interest rates higher to reduce the attractiveness of leveraged positions in shadow banking assets, beginning monetary tightening.

November 2016

Participant: CSRC
Event: Regulation

New controls are imposed on fund management companies

Interim Provisions on the Management of Risk Control Indicators for Subsidiaries of Specially Designated Clients of Fund Management Companies

These regulations were among the steps targeting the fund management channel business of shadow banking, which started to shrink.

December 2016

Participant: Financial Markets
Event: Market

Sealand Securities threatens default on entrusted bonds

Sealand Securities, a small securities firm, refused to honor certain entrusted bond contracts in December 2016, and market participants became concerned that other similar contracts may not be accepted. Money market conditions tightened significantly, and the PBOC was forced to extend trading hours to prevent interbank market defaults that might have triggered another crisis on par with the interbank market stress of June 2013.

December 2016

Participant: PBOC
Event: Monetary Policy Action

PBOC strengthens controls on WMPs, within macroprudential assessment

The PBOC includes off-balance sheet WMPs into its MPA management, limits short-term debt and long-term investments, and strengthens its commitment to “deleveraging.” This was one example of the central bank using its macroprudential tools to target shadow banking channels specifically.

January 2017

Participant: PBOC
Event: Regulation

PBOC interest rate hikes begin

Monetary tightening steps guided short-term interest rates higher in order to squeeze financial leverage, totaling 30 basis points from January 2017 through April 2018. This worked to a certain extent in reducing financial institutions’ leverage, but it failed to reduce corporate leverage. Both property developers and local governments were generally not sensitive to rising interest rates during this time, although that situation changed for property developers as the market corrected in 2021 and 2022.

February 2017

Participant: PBOC
Event: Regulation

PBOC working teams start drafting a unified asset management rule

The fact that the drafting process for these regulations started more than a year before the rules were implemented revealed how difficult it was to balance competing interests and highlighted the obstacles to implementation of the key regulatory tool for deleveraging.

March 2017

Participant: CBRC
Event: Regulation

Multiple regulations from CBRC target interbank and shadow financing

Notice of the General Office of the China Banking Regulatory Commission on Carrying Out the Special Campaign against the “Violations of Laws, Regulations and Rules” in the Banking Industry

A flurry of circulars from the banking regulator targeted interbank and shadow banking business between March and April 2017.

July 2017

Participant: National Financial Work Conference
Event: Conference

National Financial Work Conference is held in Beijing

The National Financial Work Conference was held every five years and the 2017 meeting formally established a new “super-regulator” for China's financial sector, which was eventually unveiled as the Financial Stability and Development Committee. The conference also strengthened the leadership’s rhetorical commitment to deleveraging goals. The statement said, “We should focus on strengthening financial supervision and hold the prevention of systemic financial risks as a bottom line by accelerating the construction of relevant laws and regulations, improving the corporate governance structure of financial institutions, strengthening the construction of macro-prudential management systems, strengthening functional supervision, and paying more attention to behavioral supervision.”

November 2017

Participant: PBOC
Event: Circular

Draft version of unified asset management rule is released

The initial version of the rules that would impose new controls over WMPs was released in November 2017, before final implementation in April 2018.

November 2017

Participant: FSDC
Event: Government Meeting

The State Council’s Financial Stability and Development Committee (FSDC) is established and holds its first meeting

The FSDC was established to strengthen control over the financial system and prevent gaps within the existing regulatory structure, which had allowed shadow banking to flourish.

December 2017

Participant: Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks
Event: Regulation

New regulations focus on controlling peer-to-peer networks

Notice for the Special Campaign against Peer-to-peer Lending Risks and the Regulation and Rectification of the “Cash Loan” Business

The crackdown against peer-to-peer networks continued. New regulations required local governments to complete registrations of peer-to-peer networks for eventual regulation.

December 2017

Participant: CBRC
Event: Regulation

New regulations unveiled, limiting banks’ cooperation with trust companies

Notice on Regulating the Bank-Trust Business

Banks were instructed to curtail cooperation with trust companies, one of the primary channels for shadow banking activities.

January 2018

Participant: PBOC
Event: Regulation

New regulations on interbank NCDs released

The PBOC started regulating NCDs more stringently to avoid them being used as alternatives for WMPs. The regulations included a limit of interbank liabilities to one-third of total liabilities within the quarterly MPA assessment and included NCDs within those calculations of interbank liabilities. They also limited NCD maturities to less than one year in duration.

Stage Three

Deleveraging Efforts Intensify, Shift to Regulatory Tightening

The landmark event at this stage was the publication of a new asset management rule in April 2018 that applied to almost all investment products and WMPs.

The measures reduced the scope for regulatory arbitrage and ended up producing a record slowdown in credit growth in 2018. The PBOC offset some of the financial pressure caused by these new rules by easing monetary policy.

April 2018

Participants: PBOC, CSRC, SAFE, China Banking and Insurance Regulatory Commission (CBIRC)
Event: Regulation

Unified asset management rules released as the centerpiece of regulatory tightening

Guiding Opinions on Regulating the Asset Management Business of Financial Institutions

The unified asset management rules were the primary regulatory instrument of the deleveraging campaign. The new rule applied to all asset management products and tried to reduce the scope for regulatory arbitrage, limiting both banks’ usage of WMPs and channel business with third-party asset managers. The introduction to the regulations stated: “China must standardize the asset management business of financial institutions, unify the regulatory standards for similar asset management products, effectively prevent and control financial risks, guide the flow of social funds to the real economy, and better support economic restructuring, transformation, and upgrading.”

May 2018

Participant: CBIRC
Event: Circular

New liquidity indicators aim to control banks’ maturity mismatches

Measures for the Liquidity Risk Management of Commercial Banks

The CBIRC introduced new liquidity indicators, including a liquidity coverage ratio, to reduce the prospect of a maturity mismatch for banks.

July 2018

Participant: PBOC
Event: Regulation

First modifications easing the implementation of asset management rules introduced

Notice of the General Office of the People’s Bank of China on Further Clarifying the Matters Related to the Guiding Opinions for Regulating Asset Management Business of Financial Institutions

This was a supplement to the new asset investment rule, moderating the impact of the rules to some extent. The key provision allowed banks to sell “cash-type” WMPs to avoid too sharp a contraction in their WMP business and interbank liabilities. Later on, cash-type WMPs became a key target of the deleveraging campaign.

August 2018

Participants: Investors
Event: Market

Investors in failed peer-to-peer products protest in Beijing

Thousands of protesters came to Beijing’s Financial Street and the offices of the banking regulator to protest losses in peer-to-peer lending products. The protesters were generally placed on buses and sent home, without receiving any compensation for losses.

September 2018

Participants: Central Committee of Chinese Communist Party, State Council
Event: Regulation

Regulatory controls on SOEs attempt to control debt levels

Guiding Opinions on Strengthening Asset-Liability Constraints of State-Owned Enterprises

This was the primary regulation concerning SOE deleveraging. SOEs’ formal leverage ratios were required to drop by 2 percentage points from the end of 2017 to the end of 2020.

December 2018

Participant: CBIRC
Event: Regulation

WMP departments separated from commercial banks

Measures for the Administration of Wealth Management Subsidiary Companies of Commercial Banks

These new regulations required banks to separate their WMP departments from the bank and manage them in a separate entity.

Stage Four

Consolidation and Fallout

The bankruptcy of Baoshang Bank revealed the consequences of slowing credit growth in the shadow banking system and weakening implicit guarantees on some institutions.

Several other banks needed to be restructured after Baoshang, including Hengfeng Bank, the Bank of Jinzhou, and the Bank of Harbin. Supplementary rules concerning deleveraging continued to emerge, sometimes by easing previous rules.

The basic framework for deleveraging had been established at this stage. Deleveraging continued, but policy efforts have stabilized and are no longer intensifying.

May–August 2019

Participants: PBOC, CBIRC
Event: Market

Baoshang Bank defaults, sparking contagion within the banking system

Public Announcement from the People’s Bank of China and the China Banking and Insurance Regulatory Commission on Assuming Control of Baoshang Bank Co., Ltd.

There were a series of bank failures, bailouts, and restructurings as a consequence of deleveraging and the contraction of shadow financing channels. These started with Baoshang Bank’s failure in May 2019 and extended quickly to the Bank of Jinzhou and Hengfeng Bank.

May 2020

Participant: CBIRC
Event: Regulation

Tightening steps target trust loans

Notice by the China Banking and Insurance Regulatory Commission of Requesting Public Comments on the Interim Measures for the Administration of Trusts

Further tightening steps targeted trust loans specifically. At this point, the other two channels (funds and brokerages) were already shrinking, leaving trusts as one of the only active channels for shadow banking business lines. Trust companies were required to shrink their trust loans by 20 percent every year over the following five years.

August 2020

Participant: PBOC
Event: Regulation

“Three red lines” for property developers’ borrowing imposed

This was the critical step that brought developers’ pre-construction sales model of financing to an end by reducing leverage through all forms. It started the property sector’s dramatic correction, which continues today, exposing the market’s imbalance between the pace of construction and fundamental demand.

May 2021

Participants: CBIRC, PBOC
Event: Regulation

New restrictions on cash-type WMPs introduced

Notice by the China Banking and Insurance Regulatory Commission and the People’s Bank of China Regarding Matters Concerning Regulating the Administration of Cash Management-Based Wealth Management Products

Additional restrictions were imposed on cash-type WMPs, to reduce banks’ capacity to circumvent the asset management rules, as these rules had previously made exceptions for these types of WMPs.


China’s multiyear campaign targeting shadow banking effectively replaced one form of financial risk with another.  While the system became less vulnerable to short-term funding squeezes and maturity mismatches, the deleveraging effort slowed credit growth substantially and created new forms of credit risks as borrowers lost access to financing. Property developers replaced shadow borrowing channels with direct borrowing from home buyers via mortgage loans, and the property bubble continued expanding.

China now faces difficult strategic decisions on how to manage financial stress while maintaining economic momentum in the years ahead.  But no matter what choices Beijing makes, the pre-deleveraging model of economic growth has come to an end.

This report was made possible by the generous support of the Smith Richardson Foundation.

Written by

Logan Wright

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

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Photo Source

Header: Chinese People's Armed Police walk past the People’s Bank of China (PBOC) in Beijing, China. (Emmanuel Wong/Getty Images)