Question

Why would an economic downturn cause problems for Chinese companies that borrowed heavily?

Short answer

The economic downturn would not allow the companies to pay back their loans easily, and companies might stand bankrupt.

Step-by-step solution

Explanation

A few Chinese companies borrowed huge amounts during the expansion of the economy. Since the citizens and financial experts believed that the boom period was over and the economy was to slip into a recession, it created a fear of havoc among the investors.

The investors were worried because the aggregate demand would decline in recession, and they would have to reduce their output. A shorter output directly implies a decline in profit. If the Chinese companies’ profit would decline, they would not be able to pay off the loan and might go insolvent and permanently shut down.