China's massive corporate debt still remains the biggest threat to the global economy, and the country's central bank again warns of the unprecedented systemic risks posed by this massive debt pile plus its household and government debt.
The People's Bank of China warned Thursday of the looming financial danger posed by China's enormous debt load, which has accumulated over the years, including shocks from overseas uncertainties.
The risks PBOC is concerned about include unpredictable oscillations in the stock and fixed income markets and potential bond defaults in real estate companies, said Zou Lan, director of the PBOC's financial markets department.
He also said the COVID-19 pandemic and high volatility in international capital flows have shocked China's financial market, while making the default risk "rather high."
"The stock, bond and commodities markets face oscillation risks," argued Zou.
"A small number of large-scale enterprise groups are still in a period of risks being exposed, middle and low-quality enterprises still face financing difficulties, and the risk of default is rather high."
Zou said pressure from rapidly rising house prices in some hot cities is relatively large. As a result, the potential of debt defaults and other risks among highly leveraged medium-sized and small real estate businesses has also risen.
China's total debt load -- corporate, household and government -- jumped to more than 300% of its GDP in the first quarter of 2019 compared to the same period in 2018, according to the Institute of International Finance.
The debt-to-GDP ratio rose to 285% as of the end of the third quarter of 2020 compared to an average of 251% between 2016 to 2019, said German multinational financial services company, Allianz SE.
Massive debt has been an intractable problem for China, which has been trying to reduce its undue reliance on debt by tightening regulations to accelerate deleveraging, or the process of reducing debt.
Both Moody's Analytics and Fitch Ratings in December 2019 identified China's corporate debt as the biggest danger faced by the global economy.
"I would point to Chinese corporate debt as the biggest threat," said Mark Zandi, Moody's Chief Economist, who said this debt is growing very rapidly in China.
The alarming PBOC warnings are the latest from high-level officials in recent weeks about domestic market risks compounded by debt. In response to the rise in debt, China in the next few months will resume its deleveraging campaign seeking to ease the excessive downward pressure on its economy still recovering from the economic damage wrought by the coronavirus.
The central government said deleveraging is one of its "five major tasks" this year. The overall goal of the deleveraging campaign is to keep overall leverage (the ratio of debt to GDP) generally stable. Debt reduction will be aimed at reducing excess housing inventory and slashing overcapacity in certain sectors.
