IMF warns China on growing debt load

China is likely to record economic growth of 6.7% this year, up from a previous forecast of 6.2%, but the world’s second-biggest economy needs to address its spiralling debt says the International Monetary Fund (IMF).

The Washington-based institution’s annual report on China also projects annual growth between 2017 and 2021 averaging 6.4% against a previous estimate of 6.0%. However, the IMF warns that growth fuelled by debt is a short-term solution and unsustainable over the longer-term unless the Chinese government addresses deeper structural issues.

“The growth outlook has been revised up reflecting strong momentum, a commitment to growth targets, and a recovering global economy,” the IMF commented. “But this comes at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term.”

The report urges China’s leaders to use the opportunity presented by robust growth “to accelerate needed reforms and focus more on the quality and sustainability of growth.” The alternative “is further large increases in public and private debt.”

The IMF warns that “international experience suggests China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown.”

It estimates that had credit expanded at a more “sustainable” pace over the period 2012 to 2016, China’s economy would have averaged growth of 5.5% annually against the 7.25% recorded. “The key policy imperative is to replace precise numerical growth targets with a commitment to reforms that achieve the fastest sustainable growth path,” the report notes.

Despite the warnings, the Fund does not anticipate that China will manage to reduce its debt load. The latest report predicts that total non-financial sector debt will increase from about 235% of gross domestic product (GDP) in 2016 to more than 290% by 2022. The IMF had previously forecast that debt would peak at 270% of GDP.

The report also expresses concerns over the rapid growth of the country’s banking sector. “China now has one of the largest banking sectors in the world,” it notes. “At 310% of GDP, China’s banking sector is above the advanced economy average and nearly three times the emerging market average.

“The sharp growth in recent years reflects both a rise in credit to the real economy and intra-financial sector claims. The increase in size, complexity and interconnectedness of these exposures have resulted in sharply rising risks.”

On a more positive note, the report praises China’s efforts to boost oversight and regulation of financial sector risks, to control a run-up in corporate debt, to better manage capital outflows and to stabilise fluctuations in the yuan (CNY).

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