Financial risks in China’s corporate sector: real estate and beyond

Recent tensions in China’s real estate market have highlighted the risks inherent in the country’s highly leveraged corporate sector. These risks have been building up for some time, as high investment rates have coincided with high levels of debt accumulation. Moreover, the source of debt has moved beyond the traditional banking sector, with non-bank financial institutions providing financing which is less stable and more susceptible to sudden changes in investor sentiment. In addition, tensions in large corporate sectors could be transmitted to the rest of the economy through a number of channels. These channels include households, which are themselves increasingly leveraged and whose wealth is significantly exposed to the real estate market. A wider Chinese growth slowdown could, in turn, have global repercussions, given the size of the Chinese economy, its important global trade linkages and the central role it plays in international commodity markets. Against this backdrop, this article will review the rise in financial risks in China’s economy stemming from increasing private sector leverage, the interconnectedness between the financial and non-bank financial sectors, and households’ rising debt exposures. JEL Classification: E5, E6, G2, G5