IMF warns China about debt ‘bomb’

ACCORDING to the Financial Times, in its second annual report on the world’s second largest economy, the IMF said China’s economy would average 6.4% growth during 2018-2020 and 6.7% this year, from a forecast of 6.2%.

With the promise of doubling the size of the economy between 2010 and 2020, the Chinese government has allowed debt levels to rise sharply to meet growth targets.

“International experience shows that China’s current momentum in debt is risky, with the risk of a sudden and dramatic correction,” the IMF said.

It added that high levels of debt would cause Beijing to lose its “fiscal balance” in response to any possible crisis in the interbank market or a “loss of confidence” and asset management products that are widely sold in the “underground” banking market in China.

Jia Zhongxia, China’s representative at the IMF, rejected the warning issued by the IMF. “The strong growth of China’s economy since 2017 is not just a result of the stimulus package, but actually reflects the rebalancing and structural adjustment of the economy. The IMF’s scenario of a sudden slump in the Chinese economy is unlikely.”

Following the global financial crisis of 2008, Chinese authorities have allowed credit growth, which totalled more than four times the total debt, to $28 trillion by the end of 2016.

In the report, the IMF stressed that China’s “creditworthiness” has dropped sharply over the past decade. “By 2008, new credit lines of 6.5 trillion yuan would be enough to help nominal GDP increase by 5 trillion yuan. By 2016, the amount of credit needed to make a similar increase in GDP is 20 trillion yuan.”