Abstract: This paper aims to identify potential drivers behind China’s rising corporate leverage, using an international aggregate panel dataset. We find strong evidence of significantly negative effects of the internally financed share of capital expenditure on the change of corporate debt/GDP: a rise in internally generated funds relative to gross capital formation consistently slows corporate debt buildup. While our core finding is robust to choices of benchmark models, control variables and data samples, this negative effect appears more pronounced in China’s case. Our regressions also suggest more important roles played by real economic factors than monetary factors. While the investment rate contributes to rising corporate debt, a higher saving rate dampens corporate leveraging. Finally, we present some evidence of consistently negative impacts of government debt on corporate leveraging, suggesting possible interactions between corporate and government debts. Overall, our empirical evidence points to the declining investment efficiency as a possible important driver behind China’s high and rising corporate leverage, in light of its high investment rate and low internally funded capex ratio.