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Rescaling China’s Debt Mountain

The IMF estimates that 15% of Chinese loans to nonfinancial corporations are at risk, implying that the book value of the bad loans could be a quarter of national income. Policymakers have three options – none of them painless – for addressing the problem.

MONTREAL – There is widespread agreement on two facts about the Chinese economy. First, the slowdown has ended and growth is picking up. Second, not all is well financially. But there is no agreement on what happens next.

The good news is that domestic demand continues to grow. Car sales were up nearly 10% in March over the same month in 2015. And retail spending grew at an annual clip of 10% in the first quarter.

The most dramatic increase, though, is in investment. Real estate investment is growing again, following its collapse in 2015. Industrial investment, especially by state-owned enterprises, has been rallying strongly.