The IMF on Wednesday said that corporate China’s balance sheets have deteriorated to the point that about US$1.3 trillion of borrowing is at risk of default.
It said that the financial health of Chinese companies has declined as profitability has sunk amid slower economic growth and there is clear evidence that more companies are not earning enough to cover the interest owed on borrowings.
Such “debt at risk” has risen to 14 percent of all debt at listed Chinese companies, triple the level of 2010, the IMF said in its Global Financial Stability Report.
That means that bank loans at risk amount to nearly US$1.3 trillion, it said.
“These loans could translate into potential bank losses of approximately 7 percent of GDP,” the report said.
The IMF said that given the buffers Beijing has built up for its banks and still-strong economic growth, the huge number is recognized by authorities and is “manageable.”
Even so, it added that “the magnitude of these vulnerabilities calls for an ambitious policy agenda.”
The IMF said Beijing needs to address the massive corporate debt overhang and further strengthen its financial institutions.
In the report, the IMF also said that world financial markets have calmed after turmoil earlier this year, but more needs to be done to ensure global financial stability amid slowing growth, weak commodity prices and worries about China’s economy.
“If the growth and inflation outlooks degrade further, the risk of a loss of confidence would rise. In such circumstances, recurrent bouts of financial volatility could interact with balance sheet vulnerabilities,” the report said. “Risk premiums could rise and financial conditions could tighten, creating a pernicious feedback loop of weak growth, low inflation and rising debt burdens.”
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