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China unlikely to see financial crisis

By Louis Kuijs | China Daily | Updated: 2017-06-12 08:04

Moody's downgrading of China's long-term local currency sovereign debt from Aa3 to A1 is badly timed, as it coincides with China's efforts to attract foreign investment into the domestic bond market. However, China's massive credit expansion has led to misallocation of credit and build-up of financial risks.

The debt of the central government and households remains modest. But at about 153 percent of GDP at the end of 2016, non-financial corporate debt is very high for an emerging market, with a large share of the debt held by structurally unprofitable companies in heavy industry with major overcapacity.

While the associated financial risks of high corporate debt are in first instance borne by financial institutions, they will in part end up as a liability for the government. Also, local government debt is high and still rising despite the central government's efforts to rein it in. And although poor transparency is hindering visibility, estimates show the nationwide local government deficit has been about 5 percent of GDP in recent years. Hence, the creditworthiness of China's government debt has deteriorated in recent years.

China unlikely to see financial crisis

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