As such, the Societe Generale analysts highlighted three key steps that China’s politicians must take in order to slowly deleverage the Chinese economy. This includes efforts to slow new credit growth so the debt risk will accumulate at a slower pace; speeding up financial innovations in order to lower the debt service burden on corporates and alleviate some of the rollover pressure on banks; and lastly, to start writing off non-performing assets so that the economy can become more efficient and more able to pay back debt.

However, the way back from the credit debt crisis will prove to be a bumpy ride for the Chinese government, the report said.

“The aforementioned strategy to deflate the credit bubble has a chance of helping China avoid a full-blown banking crisis in our view. Nevertheless, the fiscal cost will not be low and the execution will be prone to downside risks. The deleveraging process that China will have to go through will be painful no matter what scenario unfolds,” read the conclusion.