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IMF Warns China About Dangerous Reliance on Debt

IMF Warns China About  Dangerous Reliance on DebtIMF Warns China About  Dangerous Reliance on Debt

China’s dependence on debt was growing at a “dangerous pace” and it must act to head off a brewing crisis, the IMF warned late Tuesday.

The IMF also said the leaders of the world’s second-largest economy should continue with vital reforms or risk a painful correction, adding that Beijing’s “unsustainably high” growth goals added to the problem, AFP reported.

While the country has made progress in its attempts to recalibrate the driver of growth, the fund said failure to attend to structural issues could destroy that work.

The IMF’s warning comes weeks after a global central bank watchdog said China’s banking sector could be facing an imminent debt crisis, fuelling worries a blowout could send tremors through the world economy.

In an update to its World Economic Outlook, the IMF said: “China continues to make progress with the complex tasks of rebalancing its economy towards consumption and services and permitting market forces a greater role.

“But the economy’s dependence on credit is increasing at a dangerous pace, intermediated through an increasingly opaque and complex financial sector.”

The IMF said China should rein in credit growth and cut off support to state-owned enterprises that were unviable, “accepting the associated slower GDP growth”.

China’s total debt hit 168.48-trillion yuan ($25 trillion) at the end of 2015, equivalent to 249% of national GDP, the Chinese Academy of Social Sciences, a top government think-tank, has estimated.

And in September the Bank for International Settlements—dubbed the central bank of central banks—said a gauge of Chinese debt hit a record high in the first quarter. Its credit-to-GDP gap reached 30.1% in the January-March quarter, its highest level on record and far above the 10% level associated with risks.

China is seeking to restructure its economy to make the spending power of its nearly 1.4 billion people a key driver for growth, instead of massive government investment and cheap exports.

But the transition is proving painful as growth rates sit at 25-year lows and key indicators continue to come in below par, weighing on the global outlook as the Chinese economy is a key driver for the world.

The IMF said it expected growth of 6.6% in 2016—the same as its forecast in July—slowing to 6.2% in 2017 “absent further stimulus”.

It also said it saw inflation rising to 2.1% in 2016 and 3% over the medium term as slack in the industrial sector and downward pressure on goods prices diminished.

 

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