China’s bad debts may worsen if growth falters below 6 per cent, warns US rating agency

China’s bad debts may become worse if its growth falls below 6 per cent, according to US rating agency Moody’s.

The respected ratings agency said that the trade policy of the United States will be a significant risk to business growth and trade and supply chains, not just in China, but globally.

Facing a trade war with the US, along with economic growth at the slowest in decades, China has launched a series of measures aimed at providing better support to private enterprises, which have struggled to find funds as costs of borrowing skyrocketed, with corporate defaults hitting a record high last year.

China’s private sector contributed more than 60 per cent of the nation’s gross domestic product (GDP) growth in 2017.

Beijing has attempted to unwind debt accumulated in its financial system, in particular through the shadow banking system, on which small and medium-sized companies have relied on for credit.

However, most shadow banking activities have been curtailed by moves to reduce risky lending, leaving smaller, private business with sharply reduced access to credit.

“What we have seen in the last two years is that there’s been a gradual shrinkage of shadow banking assets relating to GDP,” said Stephen Long, Moody’s managing director for financial institutions for Asia-Pacific in Beijing on Tuesday.

“I don’t think we see that decline at the same pace as it’s declined in recent times.”