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China's debt growth has been alarmingly high for the last 7 years, driven by rapid growth in corporate debt and local government debt. Much of China’s breakneck growth over the past two decades has been fueled by state-led investment and debt. Concerns about a credit buildup have grown as the economy has slowed.
Companies’ financial liabilities now amount to 160% of gross domestic product, up from 98% in 2008, according to estimates by ratings firm Standard & Poor’s Financial Services LLC. Breaking down by sector shows that debt is dominated by real estate developers and commodity producers, both sectors with weak fundamentals due to overcapacity and uncertain demand outlook.
Chinese regulators have floated in recent days ways to deal with the economy’s mountain of bad loans by allowing banks to directly swap a company’s soured debt for a stake in the borrower, and encourage banks to securitize bad debt to sell at a discount to investors.
China’s Premier Li Keqiang confirmed Wednesday that the country may use debt-to-equity swaps to cut the leverage ratio of Chinese companies, speaking during a press conference at the close of the NPC meetings. Li acknowledged concerns about rising debts and potential bad loans at banks but said debt levels and manageable due to large reserves at financial institutions and a high savings rate.
