China's hard landing not likely, but still possible: report

The Chinese economy is showing signs of improvements centered around growth in its domestic consumption, but the possibility of a hard landing still lingers due to growing corporate debts, a South Korean think tank said Wednesday.

In a report, the Korea Economic Research Institute noted the possibility of China's hard landing has been somewhat reduced on a rise in local spending.

"Initially, there had been concerns that China's economic restructuring might create a hindrance to its growth, but such risks are being gradually reduced on a rise in consumption that has become a strong growth factor and positive outcomes of restructuring," the report said.

The Chinese government has also successfully worked to lessen the possibility of a hard landing by reducing the debts of the country's regional governments, it noted.

The debt ratio of China's rural governments came to 9.9 percent as of end-2015, compared with 22.8 percent two years earlier.

Despite reduced risks of a hard landing stemming from China's public sector, those from its private sector still remain high, the report said.

The average debt ratio of Chinese companies stood at 170.8 percent at the end of last year, significantly higher than the average 71.2 percent for American companies and 102.8 percent and 101.3 percent for companies in Europe and Japan, respectively.

"Also, out of all corporate loans that are near their maturity, the largest portion of 35.6 percent were owed by China's real estate sector," the report said.

"As the Chinese government remains well prepared, it may help prevent the possibility of corporate loans causing a financial crisis, but a contraction in the real estate market amid the growing insolvency of marginal firms cannot but raise the possibility of a hard landing," it added.

A Chinese hard landing could create serious problems for South Korea and other neighboring economies.

It said a 1 percent drop in China's gross domestic product could trigger a 0.37-percent reduction in South Korea's own GDP, the third largest figure after a 0.4-percent cut in Australia's GDP and a 0.39-percent reduction in Taiwan's GDP, according to the report. KERI is a private think tank run by the Federation of Korean Industries, the largest business lobby in South Korea that represents the country's top 600 firms. (Yonhap)