Debt 'manageable', but plan to double economy's size has risks, report says
The International Monetary Fund spoke positively on Wednesday of China's efforts to rein in its rapid credit growth but called for more action to reduce the associated financial vulnerabilities, as the issue is still "very manageable".
In its latest Global Financial Stability Report, the IMF said the world's financial system has become safer and more stable since its last assessment in October.
Tobias Adrian, the IMF's financial counselor and director of the monetary and capital markets department, said China is a key contributor to global growth but has notable vulnerabilities, mentioning that the nation's credit in relation to its economy has more than doubled to 200 percent in less than a decade.
"A credit boom this big can be dangerous. The longer they last, the more dangerous they become," he said.
According to the IMF, China has been an engine for the global economy.
Adrian said Chinese officials continue adjusting policies to limit the growth of banking and shadow banking. "They show some success ... but, in our view, more needs to be done," he said.
Chinese authorities are aware of the issue, he said, adding that progress and success is essential for global financial stability.
The report pointed out that while China has stabilized its near-term growth outlook, its policies to contain leverage and financial risks remain constrained by the authorities' long-term growth objectives to double the average income and size of China's economy by 2020. Achieving this requires ever increasing amounts of credit.
Matthew Jones, assistant director of the IMF's monetary and capital markets department, said the Chinese economy has sufficient buffers to any changing global financial conditions.
Jones also reiterated the importance of addressing the challenges of the rapid rate of credit growth in China. "We think these challenges are very manageable. But there is urgent need for action to ensure they remain manageable by reducing the vulnerabilities associated with rapid credit growth," he said.
While painting a more optimistic view than October's outlook, the report says it is important for the governments of the United States, Europe, China and elsewhere to follow through on investor expectations by adopting the right policies.
This means preventing fiscal imbalances, resisting calls for higher trade barriers and maintaining global cooperation on regulations needed to make the financial system safer, according to the report.
"In the United States, policymakers should ensure that measures to overhaul the tax system encourage companies to invest in new machines, computers and equipment - rather than engage in financial risk taking," Adrian said.
"Emerging markets should focus on strengthening the health of corporations and the banking system. And in Europe, policymakers should tackle the structural causes of weak bank profitability."
