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Fitch: China crackdown on risky lending to pull down GDP growth

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Fitch: China crackdown on risky lending to pull down GDP growth

Fitch Ratings said June 3 that China's GDP growth rate would be reduced by 1 percentage point annually over the medium term if business is hit by a slowdown in debt growth amid Beijing's crackdown on risky lending.

"It is difficult to put a precise time frame on when China will start to see the deleveraging of the real economy, but at some point it looks inevitable. The scenario analysis we have undertaken suggests that, when it does occur, it will be a process that will be a significant drag on growth," said Brian Coulton, chief economist at Fitch.

Under Fitch's scenario, business investment growth would have to fall by 5 percentage points annually in order to stabilize corporate debt/GDP by 2022. This, in turn, would reduce GDP growth by just over 1 percentage point per year over the next few years.

"The growth shock would be driven by the sharp slowdown in business investment necessary to significantly reduce the corporate sector's borrowing requirement," said Fitch, noting that once these adjustments are implemented, China's corporate debt/GDP would follow a declining trend after 2022 without further reductions in investment/GDP.

Fitch said China's corporate debt challenges pose a downside risk to the country's medium-term growth. The rating agency expects corporate debt/GDP, which stood at 168% in 2017 to start rising again as nominal GDP growth slides towards 8% from an "unusually high" rate of over 11% in 2017.

Beijing has spent the past three years clamping down on riskier lending practices, which has slowly pushed up borrowing costs and reduced alternative funding sources such as shadow banking, Reuters reported June 4.