China should prudently manage deleveraging process: central bank working paper

People walk past the headquarters of the People's Bank of China (PBOC), the central bank, as two paramilitary police officials patrol around it in Beijing November 20, 2013. REUTERS/Jason Lee/File Photo

BEIJING (Reuters) - China should prudently manage the country’s debt deleveraging process and seek to avoid a liquidity crisis and asset bubbles, according to a central bank working paper published on Wednesday.

While overall debt ratios in the world’s second-largest economy were still not high relative to many other countries, the pace of increase has been rapid in recent years, the paper said.

China’s debt to GDP ratio rose to 277 percent at the end of 2016 from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.

China’s top leaders have pledged to focus on addressing rising financial risks and asset bubbles this year.

The People’s Bank of China (PBOC) has moved to a moderate tightening bias, raising some key primary money rates this year, which analysts said was part of a bid to control risks from rising leverage.

The working paper said China should avoid the negative consequences of both increases in leverage and rapid deleveraging.

China should let market forces play a decisive role in the deleveraging process, including allowing defaults, the paper published on the People’s Bank of China website said.

Reporting by Kevin Yao and Beijing Monitoring Desk; writing by Elias Glenn; Editing by Sam Holmes and Randy Fabi