China should prudently manage its deleveraging process to avoid a liquidity crisis or asset bubbles, according to the central bank.
"Although high leverage may lead to systemic financial risks, the crisis thresholds are statistically unstable," reads a working paper published on the People's Bank of China (PBOC) website on Wednesday.
The leverage ratio itself is not the problem, which lies in the efficiency of the leverage, the paper said, adding that the right way is to let the market decide which sectors should have higher ratios.
In using the market's role, the government should maintain its prudent and neutral monetary policy to create a moderate liquidity environment, reduce direct allocation of resources, and reform its financial market supervision.
Deleveraging is one of China's major tasks in supply-side structural reform.
A disclaimer attached to the working paper says although this sort of research reports are written by PBOC staff members, the views do not represent the central bank's official opinion.
