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China Efforts To Reign In Corporate Debt To Hurt Economic Growth, Says Fitch

Global ratings agency Fitch warns that China’s efforts to reduce corporate debt levels will likely have a negative impact on the nation’s economy, according to South China Morning Post reports Monday (June 4).

The warning offers an added level of complication to the issue, as economists say rising corporate debt levels present their own pressures and problems. Earlier this year, the China Banking Regulatory Commission warned that the nation’s current state of corporate debt is a “grim and complicated” scenario. However, addressing that debt level may have its own adverse effects, Fitch warned.

“China’s corporate debt challenges remain a key downside risk to medium-term growth,” Fitch Chief Economist Brian Coulton said in a report published last week. “Investment needs to slow sharply to reduce corporate borrowing. Such an adjustment would take a big toll on GDP growth, given that business investment is equal to a quarter of GDP.”

According to Fitch analysis, government policy to reduce corporate debt levels could pull annual GDP growth down to 4.5 percent, significantly below the nation’s 6.5 percent growth target.

“The scenario analysis we have undertaken suggests that, when [deleveraging of the real economy] does occur, it will be a process that will be a significant drag on growth,” Coulton continued.

The publication cited recent research from Reuters that pegged the nation’s total debt at $2.1 trillion, though no official data exists to calculate corporate debt. Reports also said that outstanding off-balance sheet lending dropped by $15.6 billion in the first half of 2018. That compares with more than $343 billion added to debt levels during the first half of 2017, the publication noted.

According to Larry Hu, head of China economics at Hong Kong’s Macquarie Group, “cracks have appeared” in China’s real economy, and rising default rates are adding to the pressure as a result of a steep drop in credit growth. Policymakers appear comfortable with enduring that pressure for the time being, he said, “as long as the fundamentals of the economy remain OK.”

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