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China Must Deal With High NPLs
World Economy

China Must Deal With High NPLs

China’s leading Communist Party mouthpiece says the nation has to face up to its non-performing loans and tackle a build-up of debt that is weighing on the global economy.

The People’s Daily called the country’s debt pile as the “original sin” that has led to risks in the foreign-exchange market, stocks, bonds, real estate and bank credit.

The government should put deleveraging ahead of short-term growth and drop the “fantasy” of stimulating the economy through monetary easing, the state newspaper said, citing an “authoritative person”, EJInsight reported.

“Overall, the report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reform,” said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong.

Similar commentaries have had a “large impact” in the past, the analyst said in a note.

The pace of China’s accumulation of debt and dwindling economic returns on each unit of credit have fueled concern that it is set for either a financial crisis or a Japanese-style growth slump.

The Bank for International Settlements warned last year of an increased risk of a banking crisis in China in coming years.

Brokerage CLSA Ltd. was the latest to sound an alarm, saying on Friday that the nation’s true level of non-performing loans may be at least nine times higher than the official numbers, suggesting potential losses of at least $1 trillion.

“A tree cannot grow up to the sky—high leverage will definitely lead to high risks,” the person was cited as saying.

“Any mishandling will lead to systemic financial risks, negative economic growth, or even have households’ savings evaporate. That’s deadly.”

China’s accumulation of debt has been the fastest of Group of 20 members over the past decade, according to Tom Orlik, an economist for Bloomberg Intelligence.

Debt has climbed to 247% of gross domestic product, Bloomberg Intelligence estimates.

Volatility in stocks and the foreign-exchange market early this year had partly reflected the vulnerability of the financial system, the article said.

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