China must act quickly to address mounting corporate debt, a major source of worry about the world’s second-largest economy, a senior International Monetary Fund official said on Saturday.
David Lipton, first deputy managing director of the IMF, warned in a speech to a group of economists in the southern city of Shenzhen that companies’ indebtedness is a “key fault line in the Chinese economy”, Reuters reported.
“Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both,” Lipton said, according to a copy of his prepared remarks provided to Reuters.
China, whose economy grew in 2015 at its slowest pace in a quarter of a century, has been grappling with rising debt levels and overcapacity.
Last week, the People’s Bank of China warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds.
Lipton said corporate debt in China stands at about 145% of gross domestic product, a high ratio. He singled out state-owned enterprises, which he said accounted for about 55% of corporate debt but only 22% of economic output, according to IMF estimates.
Referring to other countries’ experience, he said that China needed to deal with both creditors and debtors and to address governance problems in both the corporate and banking sectors.
“The lesson that China needs to internalize if it is to avoid a repeating cycle of credit growth, indebtedness, and corporate restructuring, is to improve corporate governance,” he said.
Massive Stimulus
China’s substantial monetary and fiscal stimulus is finally translating into stronger economic activity. Whether this boost is sustained, or fizzles out under the weight of the large structural imbalances in the Chinese economy, may be one of the defining features of this year’s global economic and investment landscape, Market Realist reported.
China’s economic stimulus started in late-2014, and continues into the present. On the monetary policy front, the People’s Bank of China has cut benchmark lending rates from 6% to 4.35% over the period, and has lowered required reserve ratios–the share of consumer deposits that commercial banks are required to hold with the central bank–from 20% to 17%.
The Chinese government initiated various stimulus measures to arrest the slowing growth. Currently, the bank lending rate is at a record low. Similarly, the reserve ratio has also been cut five times in the past year to support economic growth as downward pressures remain strong.
Meanwhile, fiscal policy has also been loosened; increased government spending has led to a rise in the budget deficit as a share of gross domestic product from 1.4% in 2014 to 3.1% in 2015, and this is likely to touch 5% over the next few years.
Policymakers have also enacted a range of ad hoc stimulus measures, such as relaxing property purchase regulations, adding liquidity to the equity market, and engineering a (ongoing) depreciation of the renminbi against a basket of other currencies.
Government Spending
In order to pump up the economy, the Chinese government increased spending from 10.9 trillion yuan ($167 billion) in 2011 to 17.6 trillion yuan in 2015.
With the rise in government spending, the budget deficit swelled from 1.1% of the GDP to 2.3% during the same period. In the first quarter, fiscal spending increased 15.4% year-over-year. However, it only grew 4.5% in April.
The central bank also pumped 130 billion yuan into the financial system to encourage more borrowing. To allay fears of an additional market meltdown, China’s regulators extended a ban on stock sales by shareholders who hold more than 5% of a major listed stock.
