China’s debt boom could lead to financial crisis, IMF warns

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The International Monetary Fund (IMF) has cautioned China’s economy is dependent on too much debt and the huge boom in credit risks going to a new financial disaster.

GDP in the world’s second biggest economy is set to rise by 6.7pc this 2017 and 6.4pc in 2018, higher than the 6.6pc and 6.2pc growth measures that the IMF predicted earlier this year.

Robust global growth has given China a boost, as has increased government expenditure.

But in the coming years, risks will increase as China’s unusual debt keeps on rising.

Progress in China has been due to rapid increments in debt in the past years.

“Nominal credit to the nonfinancial sector more than doubled in the last five years, and the total domestic nonfinancial credit-to-GDP ratio increased by 60 percentage points to about 230pc in 2016,” the IMF discovered.

Those debts are assumed to grow to about 300pc of GDP in 2022.

“Sustainable growth – growth that can be achieved without excessive credit expansion – was likely much lower than actual growth over the last five years,” the representative of IMF said.

If the debt were rising at a sustainable rate, GDP would have grown by an average of 5.3pc every year from 2012 to 2016, the IMF guesses, rather than the 7.3pc that it reached.

“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the article said.

Its examiners investigated 43 large credit booms and found that almost every single one ended in a sharp downturn or a financial disaster.

“All credit booms that began when the ratios were above 100pc – as in China’s case – ended badly,” the researchers discovered.

Debts have been funded in part by more “complex and primarily short-term funding structures… extending beyond deposit funding to interbank markets and wealth management products, and via complex and interlinked networks of entities,” the statement stated.

The additional debt in recent times has also been handled poorly, the IMF concludes, as the credit given to industrial sectors, state-owned companies and in certain regions has not been met by a surge in the value supplemented by those borrowers, “suggesting that they are using credit relatively inefficiently”.

In 2015 to 2016, the IMF assesses, it took 20 trillion renminbi of new credit to increase nominal GDP by just 5 trillion renminbi.

The IMF looked at the American savings and loan crunch of the 1980s, Japan’s 1997 banking disaster and the US and UK participation in the global financial disaster as examples of crashes that happened despite nations entering them in apparently strong points.