China's Debt_ China shouldn’t try to grow its way out of credit problem: IMF

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China shouldn’t try to grow its way out of credit problem: IMF

in IMF/OECD News
08/10/2015

IMF _ China must take proactive steps to reduce corporate-sector debt, the International Monetary Fund said.

“Moving decisively will ultimately prove less costly than trying to grow out of the problem,” said Jose Vinals, the director of the IMF’s monetary and capital markets department, in remarks sent to the press.

Cutting debt levels in China’s corporate sector “will inevitably entail some corporate defaults, exits of nonviable firms, as well as write-offs on nonperforming loans,” he said. China will have to move with “great care,” he added.

Corporate and bank balance sheets in all emerging markets have up to $3 trillion in overborrowing, with China leading the way, the IMF estimated in its latest Global Financial Stability Report.

China’s banks have only recently begun to address growing asset quality challenges. Charge-offs rose to 26% of gross nonperforming loans in 2014.

In additional to tackling debt, the IMF said China should remove the “unconventional” measures put in place to stem the recent bursting of its equity bubble.

These policies weakened market confidence that China could smoothly resolve its economic challenges, the IMF said.

In particular, the IMF singled out the China Securities Finance Corp., which took stakes in Chinese companies as part of the market rescue. China should explain the agency’s market role and the extent of its interventions and equity holdings, and an eventual exit strategy from its current balance sheet should be established, the IMF said. Looking forward, China must continue to move toward freer markets, the IMF said.

Chinese officials “should rely less on moral suasion to guide banks’ lending activities and allow loan policies and interest rates to be determined by commercial considerations,” the report said.

Overall, the IMF said global financial stability is not assured and downside risks prevail. The IMF said other developed and emerging market economies should urgently upgrade their policies.

Policy missteps or adverse shocks could result in prolonged market turmoil, cutting nearly 3% of global output by 2017.

Source: Bloomberg

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