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Leverage in the non-financial corporate (NFC) sector in China has risen sharply over the past decade. Concerns about the country’s state-owned enterprises (SOEs) wax and wane, but angst has dissipated over the past year or so due to the stabilization in China’s rate of economic growth. However, we think it would be premature to state that Chinese SOEs are “out of the woods.” There already are signs that economic growth in China may be inching lower anew. Should capital outflows pick up sharply again, authorities may need to tighten liquidity in an effort to staunch the outflow. Leveraged SOEs could be vulnerable to a rise in interest rates, potentially lead ing to renewed market angst about their financial health and the outlook for the Chinese economy.

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