Deleveraging has become a vital task for the Chinese economy. The overall leverage in China's economy, which is the total debt-to-GDP ratio, is around 250 percent. The leverage is not high, and in line with the level of the US and major developed economies in Europe. Japan's leverage level is much higher.

The level of leverage of an economy is mainly determined by its national savings rate, which is composed of the savings rates in the government, corporate and household sectors. According to my research, China's national savings rate is 38 percent of total income, although official statistics say it is close to 50 percent.

 But even if we apply my research figure, China's national savings rate is still two times higher than in the US, and at least 10 percentage points higher than the average savings rate of Japan, the UK, and most other Organisation for Economic Co-operation and Development (OECD) countries.

An economy with a high savings rate naturally will have relatively high leverage. Imagine the economy is composed of two individuals - one borrows money to invest and the other just deposits savings. And if the saver wants to lend out the money accumulated, a method or channel to lend is required. There are three channels for the saver to make loans to the investor.

The first channel is through private deals, which means the transactions are not done through the financial market. This is informal or unregulated financing, and the borrower and the lender are usually relatives or friends. 

The second channel is via equity financing, which requires formal financial intermediaries. The borrower could propose to sell 90 percent of his company equity in exchange for investment and demand 10 percent of the company equity for his labor and intellectual property. But since equity financing has no obligation to pay periodic dividends and since shares have no maturity, legal obligations regarding dividends and repayment must be settled beforehand.

The third channel is via debt financing, which is also arranged by formal financial intermediaries. The borrower could offer a fixed interest rate, such as 5 percent, to the lender without having them meddle in the borrower's business performance or business decisions. Debt financing includes public bonds and bank loans.

The leverage we are discussing refers to the portion through debt financing.

The reality for China is that there are huge numbers of savers, and this provides an environment for financing. China in the past largely relied on the first unregulated financing channel. Now that private financing has gradually become regulated, financing channels are limited to equity financing and debt financing. Between the two, debt financing accounts for the large majority, given capital raised in the A-share market last year accounted for just 5 percent of the total social financing for 2015. As a result, debt financing has resulted in increased leverage in the past couple of years.

To be more specific, China's corporate debt is as high as 150 percent or 160 percent of the country's GDP, quite a high portion if compared with international standards. However, government debt, including local government debt and central government debt, is at most 60 percent of GDP, which is rather low compared with more than 100 percent in both the US and Germany.

So we must make up our mind to get rid of overcapacity through closing down zombie enterprises and clearing up bad debt, so that leverage in corporations can be reduced and business momentum can be revived. On the other hand, it is acceptable to increase China's government debt to a modest extent. In fact, as government debt, especially treasury bonds, is quite rare in the financial market, more government debt could be issued, or the yuan will not be truly internationalized.

The article was based on an interview with Li Daokui, director of the Center for China in the World Economy (CCWE) at the School of Economics and Management of Tsinghua University. bizopinion@globaltimes.com.cn