The IMF’s No. 2 official urged China to take immediate steps to tackle rising corporate debt or risk “dangerous detours” during the country’s transition to a consumption-oriented economy.
“Corporate debt remains a serious — and growing — problem that must be addressed immediately and with a commitment to serious reforms,” IMF first deputy managing director David Lipton said in the text of a speech to an economics conference yesterday in Shenzhen, China.
The comments build on other recent warnings from the global crisis lender about China’s debt, including an estimate of a possible US$1.3 trillion in loans extended to borrowers that do not have sufficient income to cover interest payments.
China has accumulated debt faster than any G20 nation over the past decade, climbing to 247 percent of GDP, Bloomberg Intelligence economist Tom Orlik said.
Chinese Premier Li Keqiang (李克強) in March said the country may use debt-to-equity swaps to cut the leverage ratios of Chinese companies.
An IMF staff report in April said China’s plan to rid banks of bad loans could backfire, allowing debt-laden “zombie” companies to stay afloat and creating conflicts of interest for bankers.
China has made “limited progress” in addressing corporate debt and restructuring, Lipton said.
He gave an estimate of total debt at 225 percent of GDP and corporate debt at 145 percent of GDP, “which is very high by any measure.”
“With the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing,” said Lipton, a former US Treasury and White House official.
“This is a key fault line in the Chinese economy. It is surely within China’s powers to address this problem, and it is important that China tackles it soon,” Lipton said.
In addition to addressing the problem quickly, China must fix balance sheets at companies, as well as banks, and improve governance to prevent a new debt bubble, he said.
Lipton and other IMF staff members are meeting with officials in China as part of an annual assessment of the nation’s economy.
Macquarie Capital Ltd on Wednesday said in a report that China’s debt is a concern, but unlikely to result in a crisis.
The borrowing is backed largely by bank deposits instead of other, more volatile funding, and the central bank could intervene quickly if needed, according to the report by Hong Kong-based analysts Larry Hu (胡偉俊) and Jerry Peng (彭港祥).
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