Chinese companies now hold $14.2 trillion dollars, more than even their American counterparts. On top of this, Hong Kong based companies own an additional $571 million. This companies with the $13.1 trillion dollars held by American companies. With the Chinese economy slowing down, however, these high debt levels could become a burden.

Corporate Debt a Potential Threat to Chinese Economy?

These already high debt levels are projected to surge past the $20 trillion dollar mark by 2018, and analysts actually believe that Chinese companies alone will hold a third of the world’s debt. Standard & Poor’s is taking an increasingly negative outlook on Chinese firms, citing the slowing economy, among other things, as a risk.

Threats to Chinese economy

Who knows what to make of China these days. On one hand, the country appears to be set to emerge as a genuine global power. China has emerged over the last decade as an economic powerhouse, regularly enjoying growth in access of 7 percent and having begun a process of diversification that should reduce the nation’s dependence on export oriented manufacturing.

On the other hand, there appear to be numerous serious contradictions within the economy itself. China’s real estate market has soared to unprecedented heights but recent data suggest that a bubble could be building. These numerous pitfalls could pose a serious risk to China and by extension the global economy.

If the Chinese economy were to suffer a steep downturn, Chinese companies could struggle with their debt levels. At the same time, efforts by the Chinese government to periodically cool off growth and restrain inflation have sent borrowing costs to periodically grow. Meanwhile, with the American dollar set to rise, borrowing costs could increase.

While Chinese government bail out companies?

The Chinese government might step in to bail out some companies, however, with debt levels now exceeding the country’s GDP, its ability to do so will be restrained. Many state-owned Chinese companies, however, are awash in debt. The government might find itself all but forced to repay this debt if a Chinese company were to edge towards default.

Historically, the Chinese government has not allowed companies to default on Chinese originated bonds. This year, however, the government did allow a solar-panel maker to default on its loans, suggesting that the government is no longer willing to step in.

The restoration of natural market forces should improve the fiscal health of companies over the long run as companies will be less likely to take on debt they cannot afford to pay back. In the short run, however, markets could become quite turbulent.