At the National People’s Congress last week, Chinese authorities raised the prospect of new measures to minimize the economic impact of China’s debt burden, using tools such as trial asset securitization programs and debt-to-equity swaps. While the size of China’s de facto non-performing asset problem continues expanding, with credit and bank assets growing much faster than nominal GDP, policies to address this problem are more likely to be focused on refinancing options to reduce interest costs rather than a broader recapitalization or restructuring of banks. A significant central government-led refinancing program could be surprisingly effective in reducing aggregate debt service and potentially improving credit transmission, but the benefits would be temporary as bank balance sheets would remain impaired.
