China has put deleveraging as one of the “five major tasks” for the government in 2021 to maintain a stable debt-output ratio, according to SCMP. The move will focus on reducing excess housing inventory and cutting overcapacity in certain sectors.
China’s move follows concerns about domestic and foreign risks emanating from its debt burden, which has grown about 30% since the onset of the coronavirus pandemic.
Last week, China Banking Regulatory Commission Chairman Guo Shuqing warned of high leverage risks in the financial system even as companies face bankruptcy and liquidation following the pandemic.
China’s debt situation is worrying as the primary borrowing source is the corporate sector which comes at higher costs.
In 2015, President Xi Jinping started China’s first deleveraging campaign to curb excessive borrowing through shadow banking and overheated real-estate financing.
China’s deleveraging campaign was scaled back in mid-2018 after criticisms it was causing economic slowdown during the trade war with the U.S.
Analysts warn that although strong policy support helped China’s post-coronavirus rebound, the economy entered the crisis with already unfavorable credit risk conditions.
There are concerns about how China will stabilize system leverage when the priority is to maintain economic growth.
China’s debt to GDP rose to a record 285% in Q3 2020 from 258% in 2019, and the country accounts for 20% of the global debt.
