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China’s Financial System is Cracking: What Next?

The world is focused on China’s strong recovery from COVID-19 and its growth prospects in 2021, but the country’s financial system is under significant pressure following a decade of rapid credit expansion. Multiple institutions—from banks and trust companies to property developers and local government financing vehicles—are defaulting on their debt, declaring bankruptcy, or being reorganized. If these credit events were taking place in a smaller emerging market, we would be worried about the risks of a financial crisis. This note reviews the rapid growth in credit events within China’s financial system in 2020 and looks ahead to 2021.

Posted February 4, 2021
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