IMF se­nior of­fi­cial says re­struc­tur­ing is es­sen­tial for coun­try to avoid debt cri­sis

China Daily (USA) - - BUSINESS - By WANG YANFEI wangyan­fei@chi­

China needs to put more ef­fort into re­solv­ing ris­ing cor­po­rate debts in or­der to sus­tain growth in the medium to long run, a se­nior rep­re­sen­ta­tive of the In­ter­na­tional Mone-tary Fund said on Mon­day.

“China truly stands out in im­ple­ment­ing re­form com­pared with other coun­tries,” said Al­fred Schipke, the IMF’s se­nior res­i­dent rep­re­sen­ta­tive in China. “The na­tion’s con­tri­bu­tion to world eco­nomic growth is still ex­tremely large.”

Schipke said that “sig­nif­i­cant progress” has been made in re­bal­anc­ing and re­form, re­fer­ring to progress made in pol­icy ad­just­ment at the top level. For ex­am­ple, re­form of the Bud­get Law helps im­prove lo­cal gov­ern­ments’ bond bud­get trans­parency. There have also been ef­forts to bridge the gap be­tween the cen­tral and lo­cal gov­ern­ments.

The IMF holds an op­ti­mistic near-term out­look for the na­tion’s eco­nomic growth, ar­gu­ing that a hard land­ing is un­likely.

But, the ris­ing debt is­sue is pos­ing high risks for the na­tion in the longer term, es­pe­cially since the na­tion now has an in­creas­ingly large, lever­aged and in­ter­con­nected fi­nan­cial sys­tem.

A re­cent re­port by the Bank for In­ter­na­tional Set­tle­ments, an in­ter­na­tional bank­ing watch­dog, showed that the credit-to-GDP gap, an in­di­ca­tor that mea­sures the buildup of ex­ces­sive credit, in China stood at 30.1 in the first quar­ter this year, by far the high­est of all re­port­ing coun­tries.

The cor­po­rate debt load is es­ti­mated to be 145 per­cent of GDP, which is a some­what dan­ger­ous level, ac­cord­ing to the IMF.

Al­though it is still con­trol­lable, Schipke sug­gested that it is es­sen­tial to iden­tify the good, bad and the ugly debts, rec­og­nize losses and share the bur­den.

In the mean­time, the na­tion should also pro­vide fis­cal as­sis­tance to help re­train and re­set­tle un­em­ployed work­ers to main­tain so­cial sta­bil­ity.

Huang Yip­ing, a cen­tral bank ad­viser, shared sim­i­lar con­cerns over po­ten­tial risks to medium-term to long-term growth posed by ris­ing debts.

Al­though delever­ag­ing has been listed among the top five tasks this year by the cen­tral gov­ern­ment, the ef­forts made in deal­ing with debt is­sues have yet to achieve progress, ac­cord­ing to Huang.

He said that the na­tion has some­how fallen into a so-called high lever­age trap, where the ef­fort to deal with long-term is­sues is stymied by the neg­a­tive im­pact to growth brought by short-term ad­just­ment.

Huang said that is not too late to con­trol the debt level, but it is ur­gent for gov­ern­ment to press ahead with re­form and with the re­struc­tur­ing of loss-mak­ing com­pa­nies, al­low­ing merg­ers and ac­qui­si­tions based on mar­ket prin­ci­ples.

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