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IMF warns that China’s credit growth is “on a dangerous trajectory”

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The International Monetary Fund warned in a new report that China’s credit growth is “on a dangerous trajectory,” with increasing risks of a “disruptive adjustment and/or a marked growth slowdown.”

The agency is calling for “decisive policy action” to smoothly deflate the country’s credit boom.

China’s economy has slowed since the global financial crisis. Last year the country reported economic growth of 6.7%, down from an average rate of 10% annual growth in the three decades before the financial crisis.

The IMF said in its report that sustainable growth (without excessive credit expansion) was “likely much lower than actual growth over the last five years”.

The agency estimated that if credit efficiency had worsened less, in line with slower credit growth, average real GDP growth for 2012–16 would have been 5.3 percent – two percentage points less than the actual average.

“Since 2008, private sector debt relative to GDP has risen by 80 percentage points to about 175% – such large increases have internationally been associated with sharp growth slowdowns and often financial crises”, the IMF said.

The IMF forecasts debt as a proportion of gross domestic product to rise from 235% to almost 300% by 2022.

The agency identified said that it identified cases of credit booms in which the credit-to-GDP ratio rose by more than 30 percentage points over 5 years. Out of 43 cases, only 5 ended “without a major growth slowdown or a financial crisis immediately afterwards.”

IMF revises growth forecasts

The agency revised China’s growth forecast to 6.7% for 2017, up from 6.2%.

It also expects China to average 6.4% growth between now and 2021, up from its previous estimate of 6%.