The Chinese Government's best option for dealing with the country's mounting debt problem is to privatise indebted state-owned enterprises and use the proceeds to retire their debt, a senior economist says.Citi chief China economist Li-Gang Liu said China's total debt, at 250 per cent of GDP, was not high compared with Japan or the United States but the composition of the debt presented problems.Liu said more than half of that debt was on the balance sheets of Chinese corporations, including state-owned enterprises."Chinese businesses are facing very high real interest rates and it would be difficult for them to grow out of their debt problem. It is a structural challenge." Liu said.Last week the China Banking Regulatory Commission reported that the non-performing loan ratio among the country's banks had risen for the seventeenth consecutive quarter.The profitability of Chinese non-financial SOEs has been in decline since 2010, according to Citi research, and the sector's loan default risk has risen significantly over the past year.Liu said privatisation was a likely scenario, as it has been part of China's economic reform agenda for some time."This kind of debt for equity swap has been done before," he said."In the late 1990s four of the country's big banks had high non-performing loan levels. China sold shares in the banks and used the money it raised to write off debt."We think the government will choose the reform route."