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China’s banking regulator tackles the country’s debt problem

China’s level of corporate debt has risen significantly over the past decade. The country’s banking regulator is now taking a proactive approach towards the reduction of corporate debt, which it announced as one of its priorities for the coming year. Other priorities include the reduction of shadow banking and the cleaning up of financial holding groups, all in an effort to reduce financial risk.

The situation is bad, but under control

As reported by Reuters, last Friday the China Banking Regulatory Commissions stated that the risk related to China’s banking sector is under control, yet it remains in a dark period. The commission advises regulators to keep clear heads and stay away from unfounded positivity. More specifically, the CBRC aims to limit the amount of credit made available to companies that already own a large amount of debt, as well as to tackle high-risk institutions.

Warning signs

China’s corporate debt levels and the worrying decrease in quality of these debt levels previously caused the International Monetary Fund (IMF) to raise red flags. Bloomberg continued to depict the graveness of the situation, as it reported that the number of corporate loans that defaulted almost tripled in 2016. At the time, China’s corporate debt levels surpassed 150 percent of the country’s GDP.

Other CBRC priorities

Next to the build up of corporate debt, China also struggles with complex structures, fictitious investments and circular capital flows, leading to the establishment oflarge, illegal financial groups.  Other priorities for the CBRC for the coming year also include curbing household leverage and reducing the misappropriation of personal loans for stock market and real estate investments.

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