The International Monetary Fund warned that China’s credit growth is unsustainable.
In this context, ‘unsustainable’ means that debts in China will face serious problems.
Concern about China’s growing debt has been mounting for a while now. In April, investor George Soros said that the Chinese economy’s reliance on debt “eerily resembles what happened during the financial crisis in the U.S. in 2007-2008, which was similarly fueled by credit growth.”
Stimulus measures after the financial crisis helped drive China’s total debt from approximately 150% of GDP eight years ago to around 225% today.
The Chinese government has cut interest rates multiple times over the past couple of years and lowered reserve requirements.
Neither household nor government debt appear to be a problem though, says the IMF; its main concern lies with the country’s staggeringly high level of corporate debt.
In the IMF’s annual review of the country, James Daniel, IMF Mission Chief for China, said that Chinese corporate debt “is still manageable, but at approximately 145 percent of GDP, it is high by any measure.”
Wealth management products, which the FT says “allow banks to channel credit to local governments, property developers and industries struggling to access normal bank loans,” grew by nearly 50% last year to 40 trillion RMB ($6 trillion).
There has been an increase in defaults and downgrades, while approximately 14 percent of debt was held by firms with profit levels below their interest payments.
The Chinese government “saw a need for more market involvement – rather than government directives – in the process, with creditors discriminating more carefully among borrowers and thereby hardening budget constraints,” the report said.
The IMF projects that corporate debt could grow by more than 20 points by 2021.
The IMF forecasts the world’s second-largest economy to expand by 6.6% this year, the lower end of the Chinese government’s target range of 6.5 to 7% growth.
“The practice of setting annual growth targets (rather than projections) has fostered an undesirable focus on short-term, low-quality stimulus measures,” the IMF said.
“China’s economic transition will continue to be complex, challenging and potentially bumpy, against the backdrop of heightened downside risks and eroding buffers,” the IMF report said.
“Vulnerabilities are still rising on a dangerous trajectory and fiscal and foreign exchange buffers, while still adequate, are eroding,” it said.