It’s no secret that China has a corporate debt problem. Earlier this year, the International Monetary Fund raised the issue over rising corporate debt levels and whether that volume could lead to economic issues down the road.
Now, analysts are anticipating some of those issues. Reports this week said the increasing number of economists raising concerns about China’s mounting debt are leading to new worries over the nation’s banking system.
Reports by Bloomberg cited the 17 defaults through June 30 this year among China’s bond market, nearly three times the number of defaults recorded in 2015. Analysts at Seeking Alpha concluded that a “banking crisis” may be headed China’s way thanks to corporate debt levels.
That’s because, naturally, banks are most exposed to corporate debt as their main source of financing. Paired with the slowing economic growth of the nation, China will probably see a risk buildup, the outlet said.
China’s corporate debt levels account for more than 150 percent of its GDP, while recent estimates of total debt in China are as high as 280 percent of GDP.
Bloomberg said there are a few ways the nation could tackle the issue, with some particularly unique options, considering that most major lenders are state-run.
“One scenario is the state could take from the prosperous — coastal regions or high-tech, for example — and give to the struggling,” Bloomberg said. “Another is the government could simply cover debt.”
Some state-owned businesses are supported by bank loans from state-owned banks in an effort to maintain employment levels, reports explained. That means some of these corporations could see their debts absorbed by the government.