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China is sitting on a corporate debt problem that makes the Indian one look modest in comparison. The International Monetary Fund (IMF) estimates that the stock of corporate debt is 145% of the size of the Chinese economy. Public debt and household debt are another 40% each. Can China deal with this when its economy is slowing?

IMF’s first deputy managing director David Lipton said in a recent speech that the potential losses to banks from their corporate portfolio is around 7% of gross domestic product—and this excludes the festering problems in the shadow banking system. In other words, the costs could be in excess of $1 trillion. That is not a small number even for an economy as large as China’s. It could be a bigger bill than what the US paid for its Troubled Assets Relief Program (Tarp).

A lot of the discussion in India is about the impact of a slowing Chinese economy. Let us not forget the prospects of financial instability arising from a banking crisis.

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