Within the past few months, the Chinese government has announced a number of broad economic reforms. The movement toward a more open economy is good news for foreign firms, but it also creates risks. "In the near term, potential negative impacts on the real economy as a result of the reform effort and credit risks associated with the rising cost of funds have to be watched out for," says Rocky Tung, Asia Pacific economist with credit insurer Coface.

Coface recently released a report describing those risks in detail. It predicts that although Chinese leaders are hoping consumer spending will take over as the nation's primary driver of economic growth, business investment will retain that position through 2014. For that reason, the rising interest rates Coface expects to see may have a significant effect on the health of the economy.

Borrowing in China has become more market-driven since the government's announcement of a lending-rate liberalization plan last July. Expectations that liquidity will tighten in the near future are putting pressure on China's local bond and money markets. And the Shanghai Interbank Overnight Rate (SHIBOR) one-week and one-month rates both rose sharply in December. "Interest rate volatility could be higher in 2014," Tung says. "The SHIBOR hike in December is indicative of the central bank's intention to reduce the pace of balance sheet expansion going forward. Businesses should manage their credit wisely; the size and number of claims [Coface is] experiencing have alerted us that credit risk in China is on the rise."

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