IMF Warns That China’s Credit Growth Is Unsustainable, According to Reuters

BEIJING – The International Monetary Fund (IMF) announced on Friday that China must curb its unsustainable credit growth and cease financial support for unproductive firms.

James Daniel, the IMF Mission Chief for China, stated in the fund’s annual review that while China’s corporate debt is currently manageable, it stands at about 145 percent of GDP, which is considered high by any standard.

The IMF has called on China to address the root causes of its credit growth risks by lowering excessively high growth targets and tightening budget constraints, particularly concerning local governments and state-owned enterprises. "This requires a comprehensive strategy and decisive measures to tackle the corporate debt issue," Daniel explained.

According to the report, non-financial state-owned enterprises are responsible for half of the bank credit but contribute only 20 percent of industrial output, indicating a need to liquidate non-viable SOEs and restructure those that are viable.

There has been an increase in defaults and downgrades, with approximately 14 percent of debt held by companies whose profits do not cover their interest payments. The report highlights that credit growth is currently outpacing nominal GDP growth by double.

Chinese policymakers acknowledge the IMF’s concerns regarding excessive corporate debt but argue that the country’s significant domestic savings, robust banking system, and ongoing development of the equity market would facilitate a smooth adjustment. They believe that any deleveraging must be gradual to avoid the negative repercussions on the financial sector and real economy that were observed in Europe during the financial crisis.

The Chinese government is advocating for increased market involvement instead of government mandates in the adjustment process, promoting more careful discrimination by creditors among borrowers to tighten budget constraints.

However, China’s banking regulator disagrees with the IMF’s evaluation of corporate debt risks, providing significantly lower estimates based on their own studies. They argue that unlisted companies are in better health than the IMF suggests and that the classification of non-performing loans should take into account not just overdue payments beyond 90 days, but also the borrowers’ long-term viability and their exposure to cyclical or structural cash flow issues.

Predictions indicate that household debt as a percentage of GDP was expected to be 41.8 percent in 2016, with forecasts suggesting an increase to 57.5 percent by 2021.