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Chinese Central Bank Governor Warns Over Rising Debt Levels

(Credit: Lintao Zhang /Getty Images) BEIJING, CHINA - MARCH 12: Zhou Xiaochuan, governor of the People's Bank of China, speaks during a press conference held for the National People's Congress at the media center on March 12, 2016 in Beijing, China. Zhou said: by the impact of falling commodity prices, we export Chinese products is still very competitive. Exports are not necessarily in a hurry to take special incentives. China's Central Bank Governor Zhou Xiaochuan News Conference
March 22
9:12 AM 2016

Zhou Xiaochuan, Governor of the People's Bank of China, has warned over rising debt levels since corporate lending as a ratio to gross domestic product (GDP) has become too high. He has also urged developing more robust capital markets while tackling the situation.

China has been embattling with illegal fund raising due to insufficient financial services. The world's most populous country requires regulation guarding against excessive leverage in foreign currencies, reports Bloomberg quoting the central bank governor while addressing the China Development Forum in Beijing on Sunday.

Debt levels in China have been witnessed to climb up rapidly during the recent years. China's total debt has soared to nearly three times of its gross domestic product by mid 2014. The debt level is simply higher than that of United States. The steep increase has largely been driven by corporate borrowing transforming China as one of the highest levels of corporate debt in the world, reports CNN Money citing a last year report by McKinsey Global Institute as the source.

Corporate debt of China has reached 160% of its GDP and has grown at a faster rate compared to any other top fifteen economies. Meanwhile, loans to companies and households have reached 207% of GDP at the end of June 2015, a 125% rise since 2008. However, total debt factoring in government borrowing is up at nearly 300% of GDP, reports Business Insider citing data of 2014 as the source.

Chinese policymakers are worried about the impact of defaults with so much debt in the system. They have stepped up efforts to cushion China's economic slowdown announcing mandatory holding of 0.5% from the bank deposits as reserves. Prudent monetary policy instead of excessive monetary policy is essential for achieving China's growth targets, cites Christine Lagarde, Managing Director of IMF.

Zhou considers developing robust capital markets as an option for addressing high leverage. He also stresses channeling more savings in the capital markets to reduce leverage in the corporate sector and boost equity financing.

China has witnessed tremendous growth in reserves after 1997 and between 2002 and 2008. Outflow of the reserve funds is taking place in the same natural pace at which inflow took place, cites Zhou while narrating the reason behind China's decaying reserve.

Chinese government will adopt required steps to avoid turmoil in stocks, the currency, bonds and property. The government will ensure planning for local government to swap high cost debt for cheaper municipal bonds proceeds, cites Zhang Gaoli, the Chinese vice Premier.

China has represented itself as one the most debt burdened countries in the world. To tackle the situation, the central bank governor has stressed necessity of developing more robust capital markets. In response, Chinese vice Premier confirmed extending all required supports in removing the turmoil.

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