Abstract
The paper presents a comprehensive analysis of China's financial situation. The main conclusion is that the financial risk of the Chinese economy is less serious than one might have predicted based on the level of the banks' nonperforming loans (NPLs), which is equivalent to 40 percent of China's GDP. If government debt (amounting to 16 percent of GDP) and short-term foreign commercial debt (amounting to 1 percent of GDP) are taken into consideration, China's overall financial risk can be regarded as still manageable, given current growth rates. This explains why China continues to enjoy financial stability despite the high level of NPLs. The paper also suggests that the correct policy for forcing reform of banks and state-owned enterprises is to keep the NPLs on their balance sheets, rather than to “swap” them into government accounts.
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