China's annual economic growth rate could fall by 1 percentage point over the medium-term if business investment is hit by a sharp slowdown in debt growth as the government cracks down on lending risks, Fitch Ratings said. In a report published on late Sunday, Fitch described the risks to growth that emerge from a scenario in which corporate debt growth slowed significantly.
"It is hard 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," said Brian Coulton, Chief Economist at Fitch.
"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." Beijing is in the third year of a regulatory crackdown on riskier lending practices, which has slowly pushed up borrowing costs and is pinching off alternative, murkier funding sources for companies such as shadow banking.
Fitch's scenario analysis suggests that to stabilise corporate debt to GDP ratio by 2022, business investment growth would have to fall by 5 percentage points per year - which would in turn reduce GDP growth by just over 1 percentage point over the next few years.
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