China to go through debt restructuring

Over the coming decade, the Chinese economy will go through a phase of intense reform, debt restructuring will be part of the transformation and has already begun in earnest.

The state sector, including state-owned enterprises (SOEs) and local government financing vehicles (LGFVs), is the cause of China's deteriorating economic efficiency and the main culprit for the mounting debt problem.

Until today implicit state guarantees have helped China avoid a systemic financial crisis, but they are now being weakened by financial market liberalisation. 

In particular, the deterioration in local government financing conditions could trigger a domino effect in terms of credit risk. The time to worry about a hard landing will be soon, if without debt restructuring.