China’s debt addiction is storing up new crisis, says IMF

CHINA’S economy is too reliant on debt and the vast boom in credit could lead to a new financial crisis, the International Monetary Fund (IMF) has warned.

GDP in the world’s second-largest economy is on course to grow by 6.7pc this year and 6.4pc next year, better than the 6.6pc and 6.2pc growth rates that the IMF forecast earlier this year.

Stronger global growth has given China a lift, as has extra government spending. But in the years ahead, risks will grow as its extraordinary debt bubble keeps on building.

Growth in China has been propped up by rapid increases in debt in recent years.

“Nominal credit to the non-financial sector more than doubled in the last five years, and the total domestic nonfinancial credit-to-gdp ratio increased by 60 percentage points to about 230pc in 2016,” the IMF found.

Those debts are expected to rise to almost 300pc of GDP in 2022.

“Sustainable growth – growth that can be achieved without excessive credit expansion – was likely much lower than actual growth over the last five years,” the IMF’S analysts said.

If credit was growing at a sustainable rate, GDP would have increased by an average of 5.3pc per year from 2012 to 2016, the IMF estimates, rather than the 7.3pc that it achieved.

“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the report said.

Its analysts studied 43 large credit booms and found that almost every single one resulted in a sharp slowdown or a financial crisis.

“All credit booms that began when the ratios were above 100pc – as in China’s case – ended badly,” the researchers found.

The extent of any crunch could be limited by China’s current account surplus and its low level of external debts, while a low loan-to-deposit ratio in the country’s banks could also help to cushion any blow. None the less, the country is exposed.

The IMF pointed to the American savings and loan crisis of the Eighties, Japan’s 1997 banking crisis and the US and UK experience in the global financial crisis as examples of crashes that took place despite countries entering them in apparently strong positions.