I’m Robert Lawrence Kuhn and here’s what I’m watching – China’s financial risk. Is it systemic financial risk and what is the government doing about it? 

Speaking at the World Economic Conference in Davos, Liu He, the official called closest to President Xi Jinping on economic and financial matters, said that China’s “authorities will strive to bring the country’s overall leverage ‘under effective control’ within three years, with a focus on curbing the growth of debt among local governments and companies.”

Local government debt has been fueled by the growth of fixed assets – infrastructure – as local governments and their leaders compete for GDP growth. Company debt is ballooned by inefficient state-owned enterprises, some of which are zombies, the walking dead.

Moreover, experts cite four additional categories of risk: new kinds of Internet financial models, “Fin-Tech” as it’s called; new kinds of wealth management products, which often promise unrealistic returns; shadow banking, where non-financial enterprises lend substantial funds; and real estate, where mortgages depend on rising or stable prices.

A worrying trend is that increasingly more debt is needed to support the same unit of GDP growth. The challenge for China is to manage the long transition to knowledge, innovation and technology-based industries while maintaining economic and social stability.

For years, foreign analysts have warned about China’s debt and financial system risk as the greatest threat to China’s economy. Yet while Chinese economists certainly recognized that China’s debt was increasing, they generally downplayed its gravity – standard behavior for supporting current policies.

Paraphrasing the cliché, “financial debt is not a serious risk – until it is.” Well, “it is.” Why else would China’s senior leaders, who seek to get out ahead of problems, have created a new agency – the Financial Stability and Development Committee? You don’t establish such a committee if the financial system is already stable. China’s leaders are determined to contain threats before they become serious. I’m keeping watch. I’m Robert Lawrence Kuhn.

(Dr. Robert Lawrence Kuhn is a CGTN anchor, a public intellectual, international corporate strategist and investment banker.)