The IMF has warned that rising debt levels in China is posing a threat to financial stability of the world’s second largest economy.
As the government focuses on monetary and fiscal policies aimed at supporting employment and growth, it keeps running companies that are non-viable—rather than allowing them to fail, IMF said in its Financial System Stability Assessment (FSSA).
It pointed out that the high corporate debt and household indebtedness are rising at a fast pace. The corporate det is now 165% of GDP, and household debt has has risen by 15 percentage points of GDP over the past five years.
“Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress,” it said.
The report urged the Chinese government to put less focus on on targets for growth — which has led to excessive credit expansion and higher levels of debt at local level — but more on spotting risks ahead and financial supervision.