Although China's economic stimulus measures post 2008 global financial crisis were successful in reviving its economic growth to at least 6 percent p.a. on average during the past decade, such measures have created persistent corporate debt. China's corporate debt surged from 94 percent of GDP in 2008, to 161 percent of GDP in 2020. This issue has triggered renewed concern after new reports of steady and significant increases in the value of bond defaults amid the protracted COVID-19 pandemic and escalating international political conflicts.
KResearch, however, assesses that the current debt defaults in China are company-specific risk, which will unlikely lead to systematic risk due to the following factors: 1) China's financial position and reserves held by Chinese commercial banks remain solid. Non-performing loans (NPLs) in the Chinese banking system declined from the record high of 1.96 percent in September 2020, to 1.75 percent in June 2021, while the capital adequacy remains robust, standing at 14.48 percent in June 2021, against the 14.21 percent recorded for June 2020; 2) The relevant Chinese authorities have been able to manage the timing and value of NPLs write-offs, thus helping alleviate their broad-based risk to the market; and, 3) The Chinese economic outlook is still bright. In 2020, while the rest of the world was experiencing deteriorating economic conditions and increased geopolitical risk, which could have caused future Chinese exports to slow down, China's external trade remained resilient as it focused on reducing its dependency on exports and relying more on domestic consumption. Moreover, China presently places emphasis on accelerated R&D development to pave the way for it to become a technology leader of the new global era, and a leader in green energy technology in alignment with its long-term strategies, including Artificial Intelligence 2030, China Standards 2035, and Carbon Neutrality 2060, aimed at steering the economy towards the new era.
In spite of this, close attention must be paid to China's household debt and property bubble because these issues could exacerbate existing problems, and in turn trigger a financial crisis amid economic uncertainties that may arise from the prevailing COVID-19 pandemic, and escalating conflicts between China and the US, plus allies.
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