China Says Rapid Debt Deleveraging Can Bring its Own Risks

  • Scale of debt and China’s leverage ratio is rising fast
  • Borrowing is uneven with government, household debt lower

Have Fears of China's Deflation Receded?

Rapid deleveraging of China’s debt can bring new risks and should be done gradually, the nation’s top economic planning agency said.

The scale of debt and China’s leverage ratio is rising fast, Sun Xuegong, an official at the National Development and Reform Commission, said at a press briefing in Beijing Thursday.

China’s borrowing is uneven with debts in government and household sectors lower and those in non-financial sectors higher, according to a statement issued before the briefing. Government and household sectors have scope to increase borrowing to help companies cut their leverage, the statement said.

China’s government debt ratio including contingent debt is 41.5 percent of gross domestic product, said Wang Kebing, deputy director of the budget department at the Ministry of Finance.

The remarks come as China grapples with how to maintain a minimum 6.5 percent annual average growth target to 2020 while preventing rising debt from spiraling out of control. China’s near-term economic outlook is being buoyed by policy support even as its medium-term prospects become more uncertain because of rapidly rising credit, excess industrial capacity and financial sector risks, the International Monetary Fund said this month.

Sun said lowering corporate leverage levels hinges on reform of state-owned enterprises. Bankruptcy is needed to cut debt in zombie companies, and they won’t be allowed to survive long, he said. The government will help those who have good prospects and short-term difficulties to refinance debts, he said.

— With assistance by Xiaoqing Pi, and Yinan Zhao

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