China’s corporate debt challenges a key downside risk to growth – Fitch
11 june 2018
China’s annual economic growth rate could fall by 1 percentage point over the medium-term if business investment is hit by a sharp slowdown in debt growth as the government cracks down on lending risks, Fitch Ratings said.
In a report published on late Sunday, Fitch described the risks to growth that emerge from a scenario in which corporate debt growth slowed significantly.
“It is hard to put a precise time frame on when China will start to see the deleveraging of the real economy, but at some point it looks inevitable,” said Brian Coulton, Chief Economist at Fitch.
Beijing is in the third year of a regulatory crackdown on riskier lending practices, which has slowly pushed up borrowing costs and is pinching off alternative, murkier funding sources for companies such as shadow banking.
Fitch’s scenario analysis suggests that to stabilise corporate debt to GDP ratio by 2022, business investment growth would have to fall by 5 percentage points per year – which would in turn reduce GDP growth by just over 1 percentage point over the next few years.
Once these adjustments are made, the corporate debt to GDP ratio would be set on a declining trend after 2022 without further falls in investment, Fitch said.
Chinese corporate debt to GDP ratio is already very high by international standards – at 168 percent in 2017 – and is expected to start rising again as nominal GDP growth declines towards the 8 percent from an unusually high rate of over 11 percent in 2017, Fitch said.