Getting local governments on board with that plan could be a problem

China says it wants to cut debt and will slash money supply next year

A Chinese policeman guards in front of a giant portrait of the late chairman Mao Zedong on the Tiananmen Gate at Tiananmen Square in Beijing, China. Getty Images

China says it's on a mission to curb high levels of borrowing in its economy — and it even aims to cut money supply next year. But people who watch the country closely aren't sure that will happen. Experts question whether the world's second-biggest economy can kick its addiction to debt-fueled growth. While Beijing may want to slow the country's growth, the risk is that a sharp deceleration may derail the entire economy. "I think it's very clear, and I think the leadership knows this. They have this very difficult problem of balancing financial risk — which is too much credit growth — against economic growth," said Fraser Howie, independent analyst. "It's a problem of their own making. For too long, they allowed credit to expand. For too long, they focused on GDP growth rate," Howie told CNBC recently.

Local government debt

Although the political commitment to cut debt appears strong at the top, there may be problems further down the pecking order. Performance by local and provincial government officials is often judged based on growth — which is boosted by debt, Howie said. There are concerns about local debt levels among central government leaders, with Beijing officials detailing concerns about "hidden debt" to China's Caixin magazine, as reported this week.

Major worries include debt related to trusts and shadow banking, which refers to lending that happens outside the formal banking sector. Such debt is subject to less regulatory oversight and higher risk. And that lending is often nowhere on the balance sheets. Such debt is believed to have been taken by local governments trying to hit growth targets or fund infrastructure work. There are fears that weak accounting practices mask the amount of risk that banks and other financial entities, such as insurance companies, are taking on. Those concerns have led some to claim that shadow banking in the Chinese economy could eventually lead to a financial crisis if the bubble pops. However, it may be possible to head off a collapse now — if the government bites the bullet.

There is a "relatively permissive environment" for China to rein in credit now, thanks to favorable domestic and external economies, said Eric G. Altbach, senior vice president at the Albright Stonebridge Group. But "there has been a reluctance to take some of these steps in the past, so it really remains to be seen whether there will be a willingness to see growth slow to the low 6s or even high 5 percentage mark in order to make these structural reforms," added Altbach, who was previously deputy Assistant U.S. Trade Representative for China Affairs. China's is targeting official economic growth around 6.5 percent in 2017.

Cutting money supply