IMF warns China against rapid credit growth and debt

The International Monetary Fund (IMF), Tuesday warned China of the risks to its economy, the second largest in the world, owing to a rapid increase in credit and debt.

In the annual review of China’s economy that IMF presented Tuesday in Beijing, it acknowledged that while the immediate prospects of China have improved through stimulus policies, there is still need to tackle the excesses of credit and production capacity.

It said the mediumterm outlook for the Chinese economy has been overshadowed by its rapid credit growth, structural overcapacity and an “increasingly large, opaque and interconnected” financial sector.

The organization, led by Christine Lagarde, highlighted China’s strong credit growth (which this year is growing at a record pace) and advised it to slow down substantially so that it fits in with its GDP growth.

The IMF also warned that it is imperative that China resolves the problem of corporate debt, which, although manageable, is high, and growing fast.

In terms of taxes, IMF advised China to reform its system of linking expenditure responsibilities and revenue of local governments, expand social security and modernize the tax system to make it more progressive.

“China is at a crucial juncture in its path towards development,” said IMF’s First Deputy Managing Director, David Lipton, who praised the progress made by the country in transforming from a production model based on industry to a servicebased one and the liberalization of its financial markets.

Lipton said that yuan’s exchange rate is more flexible following the changes introduced by the Chinese central bank last summer and that authorities are improving the quality of their statistics and its communication policy with the markets.