IMF called ‘out of line’ on debt warn­ing

China Daily European Weekly - - Business - By XIN ZHIMING xinzhim­ing@chi­

Since the early 1990s, some China watch­ers in­ter­na­tion­ally have, one af­ter an­other, pre­dicted a sce­nario in which the Chi­nese econ­omy would ex­pe­ri­ence a ma­jor re­ces­sion, although it never hap­pened. Now they seem to have found new am­mu­ni­tion for their ar­gu­ment: the coun­try’s ris­ing debt.

Fol­low­ing the down­grad­ing of China’s credit rat­ings in May by Moody’s, which cited the pos­si­bil­ity of the coun­try’s con­tin­u­ally ris­ing debts, the In­ter­na­tional Mon­e­tary Fund warned in Au­gust that China’s credit growth was on a “danger­ous tra­jec­tory”.

“In­ter­na­tional ex­pe­ri­ence sug­gests that China’s credit growth is on a danger­ous tra­jec­tory, with in­creas­ing risks of a dis­rup­tive ad­just­ment,” the IMF said in a re­port. It called for “de­ci­sive ac­tion” from China and sug­gested it press on with re­forms to cut its debt lev­els.

In­deed, such warn­ings de­serve se­ri­ous at­ten­tion from pol­i­cy­mak­ers, since China does face the chal­lenge of debt re­duc­tion. But it is cru­cial that China should not be mis­led by such a dooms­day ar­gu­ment and cut its debt lev­els in haste only to jeop­ar­dize eco­nomic sta­bil­ity, an­a­lysts say.

If sta­ble eco­nomic growth can­not be main­tained, it will in turn af­fect the coun­try’s drive to cut debt lev­els.

“The IMF’s con­clu­sion, although it de­serves our at­ten­tion, is out of line with China’s real sit­u­a­tion,” says Yu Yongding, an econ­o­mist at the Chi­nese Acad­emy of So­cial Sci­ences. “We should not adopt its sug­ges­tions.”

Given its high de­posit ra­tio, the na­tion is very re­silient in cop­ing with its debt prob­lem, Yu tells China Daily. If it rushes to solve its debt prob­lem — which has been ac­cu­mu­lated over a long du­ra­tion of decades — in a hasty man­ner, it may risk damp­en­ing eco­nomic growth.

“We have taken a se­ries of mea­sures to solve the debt prob­lem and they have been quite ef­fec­tive,” he says.

Ac­cord­ing to the Min­istry of Fi­nance, China’s gov­ern­ment debt-to-GDP ra­tio was 36.7 per­cent in 2016, lower than most ma­jor in­dus­tri­al­ized and emerg­ing­mar­ket economies.

The Na­tional Devel­op­ment and Re­form Com­mis­sion said in Au­gust that China’s over­all lever­age lev­els had dropped by the end of 2016, com­pared with the end of the third quar­ter of 2016. It also said that by the end of June, the as­set-to-li­a­bil­ity ra­tio of ma­jor in­dus­trial en­ter­prises had dropped to 55.9 per­cent from 56.7 per­cent a year ear­lier.

Yu says that once eco­nomic growth slows, lever­age lev­els could go up. There­fore, China must han­dle well the tempo of debt re­duc­tion so that ef­forts to cut debt lev­els will not be car­ried out too hastily, thereby af­fect­ing over­all eco­nomic growth.

Fi­nan­cial pol­i­cy­mak­ers should also be more tol­er­ant to­ward en­ter­prises with high debt lev­els if their op­er­a­tion re­mains on track, Yu says.

Against the back­drop of lever­age cut­ting, some en­ter­prises, thanks to their high debt lev­els, can­not con­tinue to get ac­cess to bank loans and are forced to the brink of bank­ruptcy. “If their op­er­a­tion re­mains largely sound, they may only face the chal­lenge of a tem­po­rary liq­uid­ity short­age. Banks should con­tinue to ex­tend loans to them and, as their op­er­a­tion goes back on track, they would grad­u­ally step out of dif­fi­cul­ties and be­come sol­vent,” he says.

In this way, such en­ter­prises will be able to grad­u­ally cut their debt lev­els af­ter their op­er­a­tions im­prove, con­tribut­ing to debt re­duc­tion and over­all eco­nomic sta­bil­ity, Yu adds.

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