“The risk is that a disorderly unwinding of the credit bubble produces a spate of bankruptcies that erodes the capital of the banking system, and leads to a credit crunch that produces a hard landing for the economy," Bank of Singapore chief economist Richard Jerram wrote in a recent research note.
"This is the typical developing economy experience after comparable credit expansions."
Citing data from the Bank for International Settlements, Jerram said the private-sector credit-to-GDP ratio rose 15 percentage points year-on-year to 205% of GDP based on its latest data for last September.
It remains unclear how much more GDP growth will slow when the credit bubble is brought under control, he added.
“We do not see the process as being a big risk to the global financial system, as capital flows in and out of China are relatively limited. However, there are implications for China’s trading partners – especially commodity exporters – and competitors. We see a weaker RMB as one of the measures needed to support growth during the adjustment.”
Earlier, Schroders said there could be significant consequences as capital flows out of China and authroities spend dollars trying to prop up the RMB.