People’s Bank of China (PBoC) Governor, Zhou Xiaochuan, in a speech over the weekend has warned against China’s high level of corporate debt. According to Mr. Zhou, China’s high levels of corporate debt are too high and pose risk to the economy - “Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side”.

Overall debt levels in China has reached 230% of GDP and corporate debts account for almost 170% of GDP. Though major portion of this debt is in Yuan, it still poses greater risks to the economy if the corporates fail to pay off the debt, at a time, when economic growth is slowing down fast and consumption hasn’t picked up as expected, which means China’s shift from investments and exports driven growth to consumption led would be a slower one.

One solution suggested by Mr. Xiaochuan was to build robust financial markets, which would shift funding to equities and reduce overreliance on debt.

High debt levels have been the biggest concern for us as well as investors, which according to the official data stands at Yuan 1.27 trillion but actual numbers could be much bigger. Some feel the numbers could be as big as five six times the official numbers at least or even bigger. Despite recent easing by PBoC, debt servicing cost of Chinese companies hovering around 30% of GDP, which is not sustainable going forward.

Only piece of good news is that China has finally started recognizing the issue other than hiding it but it’s far from clear how they will manage it.

Chinese market however shrugged off Zhou’s concerns and riding on weaker Dollar and improvement in risk sentiment. Yuan is currently trading at 6.48 per Dollar, up 1.3% for the year. China’s benchmark stock index is up 2.15% today, trading at 3018.