IMF says China's credit growth is unsustainable

August 12, 2016 09:29 AM

The International Monetary Fund (IMF) today said China needed to slow its unsustainable credit growth and stop financing weak firms.

"China's corporate debt is still manageable, but at approximately 145% of GDP, it is high by any measure," said James Daniel, IMF Mission Chief for China, in the fund's annual review of the country.

The IMF has urged China to tackle the root causes of its credit growth risk by easing back on unsustainably high growth targets and lax budget constraints, particularly on local governments and state-owned enterprises. 

"This in turn requires a comprehensive strategy and decisive measures to address the corporate debt problem," the IMF's Daniel said. 

China's non-financial state-owned enterprises accounted for half of bank credit but only a fifth of industrial output, the report said, suggesting non-viable SOEs be liquidated and viable ones restructured.

Defaults and downgrades have increased and around 14% of debt was held by firms with profit levels below their interest payments, the report said, with credit growth growing twice as fast as nominal GDP.

The report reflected views provided by Chinese policymakers who agreed with the IMF that corporate debt had increased "excessively". However, they argued China's large pool of domestic savings, banking system buffers, and continued equity market development would ensure a smooth adjustment, the report said. 

The speed of deleveraging would need to be gradual to prevent the kind of negative flow-on effects between the financial sector and the real economy seen in Europe after the financial crisis, Chinese officials told the IMF.

The Chinese government "saw a need for more market involvement - rather than government directives - in the process, with creditors discriminating more carefully among borrowers and thereby hardening budget constraints," the report said. 

China's banking regulator "disagreed" with the IMF's assessment of the country's corporate debt-at-risk, citing significantly lower estimates based on their own calculations, according to the report.

The regulator said unlisted companies were healthier than the IMF's assessment and classification of non performing loans needed to go past payments overdue beyond 90 days and should also include borrowers' long-term viability and whether they faced cyclical or structural cash flow problems, according to the report. 

Household debt as a percentage of GDP was forecast at 41.8% in 2016 and is predicted to increase to 57.5% by 2021.

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