NAB Group Economics estimates that Chinese national debt currently sits at 323 per cent of GDP, and while the country’s financial services sector is “relatively shielded” from many debt-related risks, declining bank fund stability means the government can no longer afford to ignore its debt issue.
“Warnings from the BIS and IMF have elevated concerns around China’s corporate debt levels. While the nature of China’s financial markets provides authorities with some additional time to address the issue, urgent reform to state owned enterprises and increased competition across the economy will be necessary to avoid a medium-term financial crisis,” said NAB.
This follows warnings from fund management firm Standard Life Investments, which earlier this year cautioned that structural reforms would be needed for China to avoid a collapse in growth.
NAB said China’s plans to restructure state-owned enterprises had “focused largely on mergers and partial privatisation” and that the government had also approved a debt-for-equity swap, but cautioned that the latter may not be enticing to investors.
“Poorly performing, highly indebted firms are unlikely to be attractive opportunities for investors – particularly those still scarred by the 2015 share market bubble burst,” it said.
“Similarly, there are concerns that banks could be forced to swap bad loans for equity in so-called zombie firms, achieving little in terms of restructuring.”
NAB Group economics said “harder decisions” needed to be made around the weakest performing state-owned enterprises, including the possibility of liquidation, if the government was going to defuse the debt “time bomb” it currently faces.
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