Shanghai China has overtaken the United States as the country with the most outstanding corporate debt despite Beijing's efforts to rein in credit growth and control its fast-growing shadow finance sector.
China's corporate issuers now account for about 30 per cent of global corporate debt, with more than a quarter of this sourced from poorly regulated shadow banks, a new Standard & Poor's report says.
The credit rating agency expects the debt needs of China to reach US$20 trillion (NZ$23t) by the end of 2018.
That's up from US$14.2t at the end of last year, which trumped total US corporate debt of US$13.1t - a shift in the rankings that came a year earlier than expected.
China's corporate borrowers have also seen their cash flow and leverage worsen since 2009, which has greatly increased global credit risk, with the property and steel sectors hardest hit.
"The Chinese government is trying to manage the situation so the question becomes who will be sacrificed to create a more efficient financial system," said S&P's head of corporate research in Asia-Pacific, Terry Chan.
There have already been a small number of company defaults across China this year, including troubled solar equipment maker Chaori, which was responsible for the first onshore bond default since the central bank started regulating the market in 1997.
Meanwhile, Shanxi Haixin, one of China's largest private steelmakers, failed to pay back its bank loans.
Chan believed the property sector was one of the biggest concerns.
"The downside scenario is that there will be a crisis of confidence," he said. "We don't want large numbers of developers to dump inventory and create a panic."
Whether that happened was "contingent on government policy."
S&P compared Chinese corporate borrowers to their global peers among more than 8500 listed companies.
It found that while Chinese companies started 2009 in a better position, their cash flow and leverage worsened in subsequent years.
The ratings agency noted the property sector's expansion was largely debt funded, part of that coming from shadow banks, including peer-to-peer lending. However, oversupply had resulted in housing prices falling 10 per cent this year, with weakness in the property marketing affecting steel demand and iron ore prices.
Chan said China's central government was relatively "light on debt" and while consumer debt was growing, it was still relatively low, meaning "debt tends to sit in the corporate sector."