IMF raises fresh alarm over Chinese debt time bomb

Jake Cordell
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Chinese state-owned enterprises have been racking up debt
Chinese state-owned enterprises have been racking up debt (Source: Getty)

Excessive Chinese borrowing is one of the most serious threats to the world economy, the International Monetary Fund (IMF) has declared, as it urged policymakers to press ahead with reforms.

Concluding its annual health check of the world’s second biggest economy, the IMF said getting a grip of the debt problem — particularly in the corporate sector — was the most pressing issue the country faces.

The IMF said: “Corporate debt, though still manageable, is high and rising fast. Addressing the corporate debt problem is imperative to avoid serious problems down the road.”

The fund estimated company debt stood at around 145 per cent of China’s GDP adding that balance sheets among the array of state-owned enterprises were particularly weak.

“Vulnerabilities are still rising and the buffers to deal with shocks are eroding,” said David Lipton, the IMF’s first deputy managing director.

State-backed firms held around 55 per cent of China’s corporate debt but accounted for only 22 per cent of economic output. The Fund said China needed to “harden state-owned enterprise budget constraints.”

The Fund also raised question marks about the “large, opaque and interconnected financial sector” that had shot up to finance China’s credit and growth boom.

Financial markets have been focussed on China’s drive to rebalance its economy, as a so-called “hard landing” there would send ripples around the world. Bank of England governor Mark Carney has said that the possibility of a serious Chinese slowdown poses a bigger threat to world financial stability than Brexit would.

“Overall, reforms across a spectrum of key areas have advanced impressively. Yet progress has also been uneven … the medium-term-outlook is more uncertain due to rapidly rising credit [and] structural excess capacity.”

The IMF said a successful rebalancing was “difficult and bumpy at times … [but] is crucial for China and the rest of the world.