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China's growth prospects remain clouded by debt

China's leaders will need to keep the nation's debt load in check if they want to achieve their ambitious growth targets, economists said.

The country's Communist Party Congress, which begins Oct. 18 in Beijing, won't set policy, but economists at an S&P Global Ratings event in Washington, D.C., on Oct. 14 said they expect the government to continue along the path of controlling debt and the shadow banking system.

China's growth accelerated to 6.9% in the first half of 2017, the International Monetary Fund said in its report on the outlook for the Asia-Pacific region released Oct. 13. To maintain its growth and competitiveness, China will need to make a serious commitment to deleveraging its debt, especially in its corporate sector, said Chris Lee, S&P Global Ratings' head of corporate ratings for Greater China.

Deleveraging in China, however, means something different than it does in developed economies, Lee pointed out.

"It means to control credit growth and slow it down to a more appropriate level relative to GDP," he said. China's total debt, including government, financial institutions, non-financial companies and households, is now running at about 260% of GDP, according to a recent Bloomberg report.

China's move to crack down on riskier lending in its so-called shadow banking sector has meant a slowdown in interbank lending this year, said Qiang Liao, S&P Global Ratings' senior director for financial institutions, Greater China.

"If that pattern holds, we expect credit losses from Chinese banks to be less worrisome," he said.

Last month, S&P Global Ratings lowered China's sovereign rating one notch to A+ from AA-, saying that, despite government policy statements, it was still accumulating debt too quickly. China’s finance ministry called the downgrade "a wrong decision."

Kim Eng Tan, senior director for S&P Global Ratings' sovereign ratings team in the Asia-Pacific region, said the situation could improve in two to three years if the government continues to take potential financial instability seriously and continues its commitment to deleveraging.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.