While the fund said the debt level is still manageable, corporate debt now sits at 145% of GDP and is growing twice as fast.
“The deviation of credit growth from its trend, a key cross-country indicator of a potential crisis, has reached 20-25% of GDP – very high by international comparison,” the fund stated in its report.
In June this year, IMF first deputy managing director David Lipton also warned China to tackle its corporate debt mountain. He pointed out that over half of the debt is attributed to ailing state-owned enterprises, which dwarfs their 22% share of economic output.
Lipton urged China to act quickly to deal with this “key fault line” as the country presses ahead with a difficult process of rebalancing its economy towards a more sustainable model.
Last week, official data for July showed signs of a further slowdown in China after hopes had been raised following very slightly improved figures for the second quarter.
While transitioning to a more sustainable growth model is seen as essential for China, the IMF warned the road will be bumpy and the process will weigh on expansion.
It now expects China’s growth to drop below 6% by 2020. The nation was already overtaken by India as the world’s fastest growing major economy earlier this year.
The fund stressed that China needs to loosen its unsustainably high growth targets and tighten up its budget constraints, especially on SOEs and local authorities.
It said reducing the access to credit of weak firms is not only critical for addressing the existing debt overhang, but also to improving the efficiency of new credit allocation.
Firms servicing viable debts should be restructured, while those that are not viable should be liquidated, it continued. “Continued support of fundamentally unviable firms will only result in greater losses.”
Highly indebted “zombie” companies in particular should be targeted, it said, starting with those in “dynamic regions” whose workers would be able to find new jobs relatively easily.
But according to the report, the Chinese banking regulator “disagreed” with the IMF’s assessment of China’s corporate debt, and calculated “significantly lower estimates”.
Overall, Chinese authorities took a different stance to the fund. They highlighted that the “quality of growth was improving, evidenced by stable employment, robust wages... and reductions in the energy intensity of GDP”.
“Over the medium term, authorities expected growth to remain in the range of 6-7% of GDP, which, they emphasised, was sustainable considering the potential for restructuring, upgrading and convergence in less developed regions,” the report said.
Also on Friday, the IMF warned that after decades of “impressive” growth, South Korea’s economy now faces a number of headwinds, including an ageing population, a heavy reliance on exports, rising corporate risks, issues with the labour market and lagging productivity.
It predicted the country’s economy would grow by 2.7% this year and 3% in 2017, and urged the government to make use of fiscal policy to face the challenges ahead.
