World Economy

IMF Says China May Face Serious Problems

IMF Says China May Face Serious Problems
IMF Says China May Face Serious Problems

China’s economy must address soaring levels of debt and speed up reforms in its financial sector in order to avoid “serious problems down the road”, the International Monetary Fund has warned.

Speaking in Beijing at the conclusion of a two-week visit encompassing meetings with high-level Communist Party officials, David Lipton, the IMF’s first deputy managing director said China’s economy stood at a “crucial juncture”, AAP reported.

He said its medium-term outlook was increasingly uncertain due to rapidly rising credit, structural overcapacity and “the increasingly large, opaque, and interconnected financial sector”.

Even as rates of economic growth have slowed to 25-year lows, total debt in China has surged to 225% of gross domestic product, of which corporate debt amounted to 145%, which Lipton said was “very high by any measure”.

“Corporate debt, though still manageable, is high and rising fast,” Lipton said. “Addressing the corporate debt problem is imperative to avoid serious problems down the road.”

Economists fear China’s near-term growth targets are being met via government policy support including infrastructure spend, interest rate cuts and direct stimulus.

But with record levels of credit flooding the financial system with diminishing returns to economic growth, the risk is that the debt-to-GDP ratio becomes unsustainably high. Non-performing loans have hit 11-year highs, as pressure mounts on China’s banking system.

 In Transition

Lipton said China was making important gains in transitioning its economy from one heavily reliant on investment and manufacturing to a more sustainable footing, driven by consumption and services. But progress, he said, remained “uneven”.

He said there were “significant advances on switching from industry to services, but less on tackling credit growth” and there financial markets were substantially being liberalized, there had been less improvement in governance and in reforming the state-owned sector.

“As a result, vulnerabilities are still rising and the buffers to deal with shocks are eroding,” he said. The Communist Party leadership’s ability to shepherd its economy through has come under tough scrutiny after a series of perceived missteps which saw steep falls in its share markets in August. A sudden central bank devaluation of its currency, the yuan, also roiled global markets.

Lipton said China should continue to improve the transparency of data and its communication of economic policy to the public to reduce uncertainties and better align market expectations.