Exclusive interviews with leading policymakers that convey the true policy message that impacts markets.
Reporting on key macro data at the time of release.
Real-time insight on key fixed income and fx markets.
- Emerging MarketsEmerging Markets
Real-time insight of emerging markets in CEMEA, Asia and LatAm region
- MNI ResearchMNI Research
Actionable insight on monetary policy, balance sheet and inflation with focus on global issuance. Analysis on key political risk impacting the global markets.
- About Us
BEIJING (MNI) - As China shifts from export-led growth toward a more
service-dominated economy, the "core challenge" remains the nation's excessive
reliance on debt to fund growth, Alfred Schipke, chief IMF representative for
China, said at a briefing in Beijing to discuss the IMF's latest World Economic
Outlook report, which was released early last month.
China's debt is large and continuing to grow, although it has increased at
a modestly slower pace recently due to the government's deleveraging efforts.
Still, debt accumulated in past years is likely to increase the fragility of the
economy, according to the IMF.
The IMF'S conclusion was echoed in the warning from People's Bank of China
Governor Zhou Xiaochuan during the 19th Communist Party Congress last month.
Zhou stressed that China needs to be aware of the risk of a so-called Minsky
moment, or a sudden major collapse of asset values sparked by debt or currency
pressures, particularly local government borrowing and rising household debt.
Schipke told MNI that "The most concerning problem at present is corporate
debt, who causes the high debt and where it comes from, and its linkage to the
China's corporate debt issue has been increasingly discussed as a "gray
rhino" -- a large and neglected danger -- as returns on investment have fallen.
The need for ever-larger sums of capital to achieve better economic results is
the main reason the Chinese economy is so heavily reliant on expanding credit
for growth, Zhang Longmei, the IMF's deputy representatives for China, said
during the briefing on Tuesday.
In addition to concerns about corporate debt, how to calculate total
Chinese public debt is controversial, Schipke warned.
"Public debt should include some invisible debt -- for example, the local
government funding facilities and government-leading funds -- so it is not just
37% of the total GDP," Schipke argued, using the Chinese government's official
figure for the government's debt-to-GDP ratio.
"If [government] regulations do not ensure that [investment] funds will not
get bailed out when they collapse, this debt actually should also be part of
public debt," he added.
The Chinese government has stressed repeatedly that the debt of local
government funding vehicles (LGFVs) does not constitute government debt. But it
is still doubtful whether local governments and their funding vehicles can cut
their close connections in a clean and clear way, considering that local
governments still depend on the LGFVs for funding and usually are major stock
holders in the investment companies.
The IMF has also issued a special warning about the risks from debt owed by
state-owned enterprises (SOEs), particularly zombie firms that have no hope of
profitability. "Fifty percent of bank loans go to the SOEs in China. If the SOEs
cannot be reformed, overall investment efficiency will not improve," Schipke
said. "[China should] make sure credit goes to the most productive parts of the
economy so companies compete with each other on an equal footing."
The IMF praised the Chinese government's efforts to deal with the nation's
debt problems through its deleveraging campaign, but it suggested that policy
makers need to further enhance reforms of the budget and tax system as part of
the deleveraging process.
The international organization also suggested that it is good time for
China to allow a more flexible foreign-exchange rate system, given the country's
recent strong economic performance, the relatively benign global trading
environment and the strict controls China imposed on its capital account earlier
"According to our statistics, the yuan has not been overly overvalued or
undervalued," Schipke stressed.
Schipke also noted the importance of the yuan's inclusion last October in
the currency basket used to calculate the IMF's Special Drawing Rights (SDR),
its international reserve asset. "It is important for the IMF, for China and for
the world," Schipke said.
The IMF's October World Economic Outlook report revised up its estimates
for Chinese growth this year and next. The IMF now sees China's economic growth
at 6.8% for 2017 and 6.5% for 2018, an increase of 0.1 percentage point for each
compared with the previous forecast in July.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: email@example.com
--MNI BEIJING Bureau; +1 202-371-2121; email: firstname.lastname@example.org
--MNI Beijing Bureau; +86 (10) 8532-5998; email: email@example.com