BEIJING (Reuters) – China’s debt defaults will not pose a systemic risk as long as economic growth remains within a reasonable range, a state planning official said on Thursday.

The country’s overall debt risk is generally controllable, and corporate leverage ratios even have room to rise if economic growth is not stable, the official said at a briefing on issues related to China’s debt levels.

The government also has room to raise debt levels, which will help lower corporate leverage, the official said.

Global investors are increasingly worried that Beijing’s continued efforts to stimulate economic activity and hit growth targets are driving debt up to unsustainable levels, raising risks to the country’s banking system.

A much-promised campaign to reduce industrial overcapacity could add to the dangers of more bad loans and defaults.

Top policymakers may share some of those concerns about excessive credit, though officials have repeatedly stressed in public that the risks are manageable.

Last month, the official People’s Daily quoted an “authoritative person” as saying China may suffer from a financial crisis and economic recession if the government relies too much on debt-fuelled stimulus.

China’s total debt load rose to 250 percent of gross domestic product (GDP) last year, and the IMF recently warned that the high corporate debt ratio of 145 percent of GDP could lead to slower economic growth if not addressed.

The state planning official said China will further develop capital markets to boost equity financing, which would help lower debt at companies.

In order to lower debt levels, China’s ability to boost economic growth is vital, a banking regulator official said on Thursday.

The risk if economic growth slows is that more debt will begin showing up on banks’ balance sheets as non-performing loans.

Banks’ bad loan ratios are rising but are still at relatively low levels, the regulatory official, adding that banks have written off 2 trillion yuan ($304 billion) worth of bad loans in the past three years.

Chinese commercial banks’ non-performing loans (NPLs) rose to an 11-year-high of 1.4 trillion yuan, or 1.75 percent of total bank lending, by end-March, earlier data showed.

A debt-for-equity swap programme proposed earlier this year to ease company’s debt burdens and let banks convert bad loans must follow market and legal principles, the state planning official said.

“Zombie firms” and companies with poor credit records will be excluded from the debt-to-equity swap programme, the official said, adding that the plan has yet to be finalised.

China will also push forward reform of state firms to help lower debt levels, the state planning official said.

(Reporting by Kevin Yao; Writing by Elias Glenn; Editing by Jacqueline Wong and Kim Coghill)

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