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China's financial stability could be at risk

Chinese Yuan going through a counting machine at a bank
Photo: STR/AFP/Getty Images

China's financial stability is at risk as the number of defaults continues to rise, and weak banks threaten the world's second-largest economy, Bloomberg reports.

Why it matters: Chinese officials are wary of stepping in because they don't want to encourage "moral hazard and reckless spending," Bloomberg writes.

The state of play: The stability of small banks is one of the major concerns as their relationship with state-owned regional companies could lead to a "downward spiral" if Beijing doesn't stop in, Bloomberg notes.

  • China's central bank and other regulators said "they are forcing troubled banks to increase capital, cut bad loans, limit dividends and replace management," Bloomberg writes.
  • A sweeping package is being floated around that would push smaller banks to merge with the support of local governments.

The bottom line: Some support measures might help China's economy and financial stability right now, but it could lead to even bigger debt problems in the future, per Bloomberg.

Go deeper: China's economy grows at slowest pace since 1992