IMF Says Debt-Laden China Needs Urgent Reforms

EghtesadOnline: David Lipton, one of the International Monetary Fund’s highest ranked officials, has warned China that it needs to initiate “serious reforms” in order to address the country’s corporate debt if it wants a smooth transition from a manufacturing to a consumer based economy.

News ID: ۷۳۵۲۳۵

19 July 2016

“If this problem is not tackled immediately, China will be taking some extremely hazardous detours as it develops,” he said in a Chinese economic forum in Shenzhen on Sunday, OpenPR reported.
No country in the Group of 20 has amassed debt at a faster rate than China over the last quarter of a century, and this is just the last in a string of stern reprimands the IMF have given to the world’s second largest economy.
According to Financial Tribune, Lipton noted that China has “not come far enough” with its efforts to limit the amount of corporate debt it is taking on, with the country accumulating approximately $1.4 trillion in overly exposed loans.

Debt-to-Equity Swaps
A report by the IMF recently criticized China’s plan of using debt-to-equity swaps to even out the leverage ratios of the nation’s biggest companies, saying the strategy could easily blow up in their face, allowing ‘shell companies’ up to their neck in debt to keep operating, thus creating a dangerous conflict of interest for bank executives.
With estimated total debt at 230% of gross domestic product, Lipton described China as being “debt laden, by any country’s standards.”
Other economists agree. Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management wrote on his blog, “I think many people are realizing that China has a very obvious weakness in its economy now, and it is being fuelled by extremely fast credit growth both last year and in the first quarter of 2016.
The other issue is the huge rates of investment which seems to have no end.”
Lane added that “fast action” will be needed on a governmental level, and both banks and multinational companies need to get their balance sheets in order.
As part of a yearly review of China’s economy, Lipton and other IMF officials will take part in a meeting with China’s top finance chiefs.
Although Lipton said the situation was urgent, he was quick to add that China is not in financial crisis.
“According to the Macquarie Capital Ltd report released earlier this month, there is a major concern regarding corporate debt, however, the situation is recoverable. There is no current crisis, but work is needed sooner rather than later,” Lipton said.

Property Market
Home price rises in China slowed in June for a second consecutive month, adding to the fear that a construction-led rebound in the economy may not be sustainable, Reuters reported.
The property market is a key driver of the world’s second-largest economy and a robust recovery in home prices and sales gave a stronger-than-expected boost to activity in the first half of the year.
But slowing price growth in smaller cities and cooling property investment show the bounce may already be fading, raising the risk of weaker economic growth in coming months.
Home prices in China’s 70 major cities rose 7.3% in June from a year earlier, an official survey showed on Monday, accelerating from a 6.9% rise in May.
To be sure, some of the biggest cities showed eye-popping gains on a yearly basis, with prices in the southern boomtown of Shenzhen up 46.7% and Shanghai up 27.7%. Gains on a monthly basis continued to slow, however, as cities tightened policies amid the fear of a housing price bubble.
The monthly rise slowed slightly to 0.8% in June, easing from 0.9% in May, according to a Reuters calculation based on data issued by the National Bureau of Statistics.