BEIJING – Earlier this year, rumors of China’s impending financial doom – triggered by either a housing-market crash or local-government debt defaults – were rampant. But, in recent months, the economy has stabilized, leaving few doubts about China’s ability to grow by more than 7% this year. Given that the Chinese government had ample scope for policy intervention, this turnaround should come as no surprise. But the moment of financial reckoning has merely been postponed, not averted.
The fundamental problems that triggered alarm bells in the first place – including real-estate bubbles, local-government debt, rapid growth in shadow-banking activity, and rising corporate leverage ratios – remain unresolved. Of these, the most immediate threat to China’s economic and financial stability is the combination of high borrowing costs, low profitability for nonfinancial corporations, and very high corporate leverage ratios. [Source]