This late 2016 IMF study identifies credit to nonfinancial corporates as the main problem, not credit to households or to the central government. However, these nonfinancial corporates include local government financing vehicles, which means that there is an accounting action that can greatly reduce the problem: writing off local government debt to state-owned banks.
Loans from the shadow or underground financial system are much less stable. However, they are also less systemic. The key risk here is where households have invested in unregulated “wealth management” products. The main solution is proper regulatory oversight backed up by an independent judicial system, which is to say, there is no solution.
As the report notes, “The state controls most of the financial sector and SOEs which constitute the most leveraged part of the corporate sector.” That makes it, at least in part, an accounting problem. Understandably, there is no mention of the very poor quality of China’s statistics, which makes the IMF’s favorite solutions more difficult to justify.
One thing we learned from the Asian Financial Crisis is that the first estimate of total nonperforming loans (for China, about 5%) ends up being one-third of the final figure, i.e., 15% in China’s case, which is painful but not dangerous.
Finally, the comparison to other country’s financial crises is largely unhelpful. Thailand, for example, ran into trouble via a fixed exchange rate, unwarranted low interest rates and a foolish effort by the central bank to fight speculators. Spain was caught by the over-valued euro and easy cross-border capital movements. China has neither of these problems.
Resolving China’s Corporate Debt Problem – an IMF Working Paper