Why China won't have a debt crisis

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Europe

03:14

Concerns about China's debt have been overblown. The country's debt pile has grown rapidly since the global financial crisis, but its current levels have stabilized.

It also pays to look a bit deeper than the often touted headline China debt-to-GDP ratio.

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Here are five reasons why China's debt is manageable and why the country won't experience a debt crisis.

One – Almost all Chinese debt is denominated in its own currency. At the end of 2018 foreign currency loans took up just 1.55 percent of all bank loans, meaning China is not subject to the external pressure of credit drying up from abroad.

Two – Many are sounding the alarm on the rise of Chinese corporate debt. However, state-owned enterprises (SOE) take up over two-thirds of all corporate debt, meaning policymakers have flexibility in managing credit as the government holds ample high quality assets that easily covers ALL government and SOE corporate debts by a multiple.

Three – Shadow banking credit has significantly decreased from tighter regulation. Entrusted loans, trust loans and banker's acceptance bills plummeted by 11 percent on aggregate by the end of 2018 from its peak at the end of 2017, meaning credit channels are more transparent, systemic risk and complexity is reduced, and loopholes are being closed.

Four – The composition of those receiving credit is changing in a positive way making the system safer, sounder and more efficient. Since the beginning of 2015 to the beginning of 2019, credit to the much less indebted household sector is higher versus the leveraged corporate sector. This rebalancing means that as parts of China deleverage, other economic agents are picking up steam.

Five – There is colossal potential in boosting equity financing in China. Currently, only 3.4 percent of all financing for non-financial corporations is raised via equities. As China continues to reform its capital markets, we will eventually see companies less dependent on debt to meet their fundraising needs and rely more on equity.

Overall, China's policymakers have implemented corrective steps in dealing with the country's debt challenge.

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