China’s Communist Party warns about debt

China’s leading Communist Party mouthpiece ‘People’s Daily’ interviewed an unnamed person who warned about the country’s rising non-performing loans and the risks associated with it.

The interview stated that the country should make deleveraging its top priority over short-term growth fueled through monetary easing policies.

The daily also made a reference to Premier Li Keqiang’s thought on banks swapping debt for equity to cut excess borrowing by Chinese firms. The daily stated that whilst bankruptcies were to avoided, “zombie” companies beyond salvage should be allowed to fail because debt-to-equity swaps would be costly and self-deceiving.

Separately, Fitch Ratings warned that China’s accumulation of debt and diminishing economic returns could spiral the nation into either a financial crisis or a Japanese-style growth slump. Further, a spike in mortgage lending meant that banks could be exposed to significant losses if property prices dropped sharply.

Brokerage firm CLSA also warned that actual NPA’s in China could be at least nine times higher than government’s quoted figures, suggesting potential losses of c.$1tn.

Source: Bloomberg