IMF Sounds Warning on China

“Corporate debt remains a serious — and growing — problem [in China] that must be addressed immediately and with a commitment to serious reforms,” says David Lipton, the IMF’s number two.

Speaking in Shenzhen, China, Lipton continued that efforts to address China’s corporate debt load — which at 145 per cent of GDP was “very high by any measure” — had seen only “limited progress”
.
“With the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing. This is a key faultline in the Chinese economy . . . And it is important that China tackles it soon,”

Lipton highlighted the state-owned enterprises, which he said were responsible for 55 per cent of the corporate debt pile despite representing 22 per cent of economic output and which “are essentially on life support”.

“In a setting of slower economic growth, the combination of declining earnings and rising indebtedness is undermining the ability of companies to pay suppliers or service their debts. Banks are holding more and more non-performing loans [and] the past year’s credit boom is just extending the problem.”

In the EPJ Daily Alert, I have been warning for some time that China is in the down phase of the business cycle and a severe collapse could occur at anytime.

That said, most countries in the rest of the world, including the US, are in a different phase of the business cycle, the up phase, a major stock market collapse in China would cause a short-term knee-jerk downward reaction in the rest of the world, but the knee-jerk reaction would be limited and not last

-RW

(via FT)