Urgent action needed to solve China’s massive debt problem

Inaction could result in a damaging hard landing for the economy.

Experts said China's growing local government and corporate debt has become a major issue for the nation's financial system, and requires authorities to work on solutions to reduce the risk of a hard landing.

The Chinese Academy of Social Sciences said the banking system can only handle possible external impacts if debt restructuring is immediately tackled. China lacks institutions and the mechanism to deal with the impact of investment decisions and these have led to the current financial risks.

A comprehensive plan must be drawn up to deal with debts, which may include financial measures that help to realize asset swaps and push forward debt restructuring. Experts said it is dangerous to allow a huge amount of bad loans to remain in the banking system, which will tighten liquidity.

In the first quarter, China saw a surging number of trust and entrusted loans, funding channels that are favored by many local governments. The People's Bank of China said trust loans grew 360% year-on-year in the first quarter to US$134 billion while entrusted loans grew 86% to US$86 billion.

Earlier this month, the China Banking Regulatory Commission ordered banks to stop extending new loans to local government financing vehicles in 2013 amid concerns over increasing amount of bad loans.