CHINA’S annual economic growth rate could fall by 1 percentage point over the medium term if business investment is hit by a sharp slowdown in debt growth as the government cracks down on lending risks, Fitch Ratings said.

In a report published late Sunday, Fitch described the risks to growth that emerge from a scenario in which corporate debt growth slowed significantly.

China is in the third year of a regulatory crackdown on riskier lending practices, which has slowly pushed up borrowing costs and is pinching off alternative funding sources for companies such as shadow banking.

Fitch’s scenario analysis suggests that to stabilize corporate debt to GDP ratio by 2022, business investment growth would have to fall by 5 percentage points per year — which would in turn reduce GDP growth by just over 1 percentage point over the next few years.

Once these adjustments are made, the corporate debt to GDP ratio would be set on a declining trend after 2022 without further falls in investment, Fitch said.

Chinese corporate debt to GDP ratio is high by international standards — at 168 percent in 2017 — and is expected to start rising again as nominal GDP growth declines towards the 8 percent from an unusually high rate of over 11 percent in 2017, Fitch said.

China’s debt crackdown will also have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch said.

Fitch said the implications of this scenario for the global economy would be significant but not dramatic, unlike a hard landing.

Debt growth for Chinese companies has slowed to the lowest rate in more than a decade, according to latest analysis.

The overall debt levels of Chinese companies grew 3 percent in the first quarter of this year, according to analysis of 1,843 firms listed in Shanghai and Shenzhen, the slowest pace in at least 13 years.

Combined total debts — including borrowing via loans and bond issuances — amounted to 13.2 trillion yuan (US$2.1 trillion) at the end of March, the slowest pace of growth year on year since at least 2005, the analysis showed.

That amount was down 6.2 percent from the fourth quarter of the year, a steep drop after companies ramped up leverage during 2017.(SD-Agencies)