Table of contents
Overview: China’s credit boom – yesterday, today and tomorrow  2  
Origins and context: Putting China’s credit boom into perspective  4
Chinese leverage in an international context  4  
Three macro reasons why investors worry about credit in China  6  
Policymakers recognize the risks and have begun to take action  11
Where has the credit gone, and where do the risks lie?  13
Identifying where the credit stands – at a glance  13
Bank loans: Risks are manageable, but areas of concern emerging  14
Corporate bonds growing fast, risks concentrated in LGFVs  18
Shadow banking risks high; current risks manageable but beware of future expansion  21
Overcapacity sectors and LGFV bonds: Two areas posing higher risk  22  
Bottom line: Bottom-up analysis reinforces top-down concerns  25
Risks, strategies and outcomes: Earlier action averts costlier results  26
China’s strategy may lean towards more proactive, with periods of forbearance as needed  29
Why not a purely proactive approach? Policymakers need to avert potential triggers of credit crisis  30
Quantifying the potential losses  33
China banking sector recaps show different options are available  38
Different remedies and implications on fiscal costs, output loss, and public debt increases  40
Credit market: Stick with stronger balance sheets, avoid weak SOE credits  41  
Equity market: Earnings/valuation uncertain during adjustment process; tipping point visibility low  42
Disclosure Appendix  46