China’s Debt Fuelled Growth Imperils Mid-Term Health for Short-Term Gain: IMF

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The International Monetary Fund has said that the Chinese government’s focus on shoring up short-term growth could be putting it on a “dangerous” path of continued stimulus and credit expansion that will imperil the economy’s longer term prospects.

The IMF has just lifted its forecast for China’s average per annum growth rate for the period from 2018 – 2020 to 6.4% from 6.0% previously.

Its current forecast for 2017 growth is 6.7%, higher than Beijing’s target of 6.5%.

In its latest annual review the IMF said there is now a higher likelihood that Beijing will be able to achieve its target of doubling China’s real 2010 GDP by the end of the decade.

These short-term gains could come at the cost of China’s longer-term economic performance, however, with the IMF pointing to “further large increases in public and private debt” as key drivers behind growth.

“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” said the report.

The IMF’s remarks come in the midst of Beijing’s heavily publicised efforts to deleverage China’s financial system and state-owned enterprise sector.

According to some analysts however, the deleveraging campaign is not actually achieving a net reduction in the total debt of the real economy, but instead easing its rate of increase in order to prevent growth from capsizing completely.

The IMF concurs with this view, with its report expecting total non-financial sector debt to increase “even more strongly” than previously forecast, rising from around 235% of GDP in 2016 to 290% by 2022.

The IMF’s figures point to a heavy dependence upon the lever of credit growth to spur economic expansion.

In its estimation China’s economy would have grown at around 5.5% as opposed to the average annual rate of 7.25% during the period from 2012 – 2016 if Beijing had kept credit growth at “sustainable” levels.

In order to achieve a sustainable growth model the IMF prescribes reforms to fiscal policy that will help to boost consumption, as well as an acceleration of ongoing state-owned enterprise reforms and deleveraging measures.

“The key policy imperative is to replace numerical growth targets with a commitment to reforms that achieve the fastest sustainable growth path,” said the report.

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