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.
Beijing, China, July 16, 2016 — 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.
“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.
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.
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.
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 percent 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 realising 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 summit 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.
Shizuoka Capital Wealth Management