David Lipton told the China Economic Society Conference on Sustainable Development in China on Saturday that addressing the nation’s substantial corporate debt is an area where there has been limited progress in the country’s efforts to rebalance its economy to a more sustainable growth model.

“This is a key fault line in the Chinese economy,” he said. “It is surely within China’s powers to address the problem. And it is important China tackles it soon.”

Corporate debt currently stands at around 145% of the country’s GDP, 55% of which is attributed to SOEs.

“That is far greater than their 22% share of economic output,” Lipton highlighted. “These corporations are also less profitable than private enterprises.

Companies are unable to pay suppliers and service their debts, he said, while banks are holding more non-performing loans.

Many SOEs are “essentially on life support” and the past year’s credit boom “is just extending the problem”, he continued.

Drawing on international experiences, Lipton said China must act quickly and effectively to avoid the situation deteriorating and becoming systemic.

He noted that this idea is gaining recognition in China, with an unnamed official recently speaking to the national newspaper People’s Daily on the need to address “zombie firms” and “debt overhang”.

Governance was also vital and Lipton said that if governance issues were not addressed debt problems would inevitably recur.

It is important to identify between well run and badly run SOEs and put policies in place to mitigate the impact of restructuring on the lives of working people, he continued, cautioning against the temptation to merge a weak SOE with a stronger one.

“To sum up, China faces an extraordinary set of challenges. Corporate debt remains a serious – and growing – problem that must be addressed immediately and with commitment to serious reforms,” Lipton said.

“China has demonstrated an extraordinary capacity to adapt and evolve over the past generation. There is every reason to believe that it can make this transition and ensure that the new normal of the Chinese economy is sustainable development that benefits both China and the world.”

China is currently working to transition from a manufacturing-based growth model to a more sustainable alternative based on services.

While much-needed, the transformation has also been a difficult one. The country posted its lowest level of growth in seven years – still a strong 6.7% – in the first quarter of 2016, and was overtaken by India as the fastest growing major economy.