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China faces 20 pct chance of a hard landing, says Swiss Re

Not everyone is convinced that China may come out of its economic transition unscathed.

Swiss Reinsurance is putting the risk of a hard landing in the world's second-largest economy at 20 percent.

At the heart of its concerns is the high level of indebtedness in the economy, much of which can be attributed to state-owned enterprises (SOEs) and companies, Swiss Re's chief economist Kurt Karl told CNBC's "The Rundown".

The share of debt to gross domestic product (GDP) has risen to around 250 percent, Karl said. It was 120 percent around five years ago.

"This rapid increase coupled with the fact that so much income (is used) to pay for the debt's interest payment; (the situation) becomes stressful," he said on Wednesday.


An investor sits in front of screens showing stock information, at a brokerage house in Hefei, China, July 8, 2015.
Reuters
An investor sits in front of screens showing stock information, at a brokerage house in Hefei, China, July 8, 2015.

"So far (the government) has done fine, but we do have a 20 percent chance of a hard landing."

He conceded, however, that the Chinese government may be able to evade the problem by stimulating the economy and restructuring the SOEs.

After years of turbo-charged growth fueled by debt, China's economic slowdown is raising concerns about whether it now has the ability to pay off those loans.

For 2015, Beijing logged 6.9 percent growth, its slowest pace in 25 years. Growth edged down to 6.7 percent in the second quarter of 2016.

On Monday, Moody's highlighted the reliance of small and mid-size banks on wholesale funds as a systemic risk.

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