World Economy

IMF Says China Debt Level Moderate

IMF Says China Debt Level Moderate
IMF Says China Debt Level Moderate

China’s household and public sector debt levels are still moderate, with corporate debt standing relatively high. But the central government is tackling the issue by addressing leverage, an International Monetary Fund official said in Beijing late Saturday.

Though China’s household mortgage-related debt has gone up quite a bit, household debt in general is not yet particularly high by international standards, Alfred Schipke, IMF senior resident representative for China, said on the sidelines of the Seminar on International Economic Governance Reform, organized by the International Economics and Finance Institute of the ministry of commerce, Xinhua reported.

As for the public sector, even if one considers a broader definition to include debt of local governments’ financing vehicles and government debt funds, the debt is not high by international standards, Schipke said, noting that authorities need to make sure this debt doesn’t continue to rise.

The type the IMF has particularly highlighted is corporate debt. In an international context, corporate debt as a proportion of GDP between 108 and 150% is considered high.

Now, the focus of China’s National Congress is to address leverage. It’s the right focus, because a large chunk of corporate debt is related to state-owned enterprises and zombie firms. By carrying out SOE reform and letting zombie firms exit, the government is addressing the debt issue, Schipke said.

Schipke also applauded China’s efforts in opening up its financial markets. “We think more competition is positive. Allowing firms coming into China to compete is a good thing. The focus is always strong regulation,” he said.

This is while, People’s Bank of China Governor Zhou Xiaochuan warned that Chinese companies have taken on too much debt, and argued for less financial leverage as well as fiscal reforms to constrain local government borrowing.

“The main problem is that the corporate debt is too high,” Zhou said two weeks ago during a panel discussion at a Group of 30 seminar in Washington held in conjunction with the International Monetary Fund and World Bank annual meetings.

While debt servicing costs remain low, “we need to pay further effort to deleveraging and strengthen policy for financial stability,” Zhou said.  He appeared alongside policy makers including Federal Reserve Chair Janet Yellen and Bank of Japan Governor Haruhiko Kuroda.

China’s surging corporate debt is a concern for global policy makers and investors alike. While the IMF upgraded China’s growth forecasts, it warned that economic expansion comes at the cost of  further increase in debt which may mask risks.

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