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China Tackles 'Grim, Complicated' Corporate Debt

China's rising levels of corporate debt are in the headlines again with the nation's banking regulator reportedly introducing to lower debt levels.

Reports in Reuters said Friday (Jan. 26) that the China Banking Regulatory Commission (CBRC) described the nation's current corporate debt and shadow banking climate as “grim and complicated” in a report outlining top priorities for the year ahead.

Those goals include tackling corporate debt, addressing issues of financial holding groups and confronting problems in the shadow banking sector.

“Regulators must keep clear heads and cannot be blindly optimistic,” the regulator stated in its report.

The CBRC specifically wants to limit the credit available to companies that already have the most debt on their books, and to shutter those institutions it considers to be high-risk. Reports said these efforts may lead to restructuring of some corporate giants.

China's corporate debt levels, and rising levels of bad corporate debt, have captured headlines in recent years. In 2016 the International Monetary Fund (IMF) raised red flags over the matter, and soon after Bloomberg reported 17 corporate loan defaults for the year through June 30, 2016. That's nearly three times the number of defaults in China's bond market the year prior.

According to reports at the time, corporate debt levels hit higher than 150 percent of the nation's gross domestic product (GDP).

“One scenario is the state could take from the prosperous — coastal regions or high-tech, for example — and give to the struggling,” Bloomberg said at the time. “Another is the government could simply cover debt.”

The CBRC also highlighted the priority to curb shadow banking, another issue that authorities have tried to address in the past. Last year, the Industrial and Commercial Bank of China's chairman Yi Huiman spoke with reporters at The New York Times to call attention to the nation's shadow banking sector.

“We have to focus,” Huiman said. “If not, the real economy will suffer.”

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