Tags: China | economy | credit | bubble

UK Telegraph: China Ignores IMF Warnings

Friday, 19 Jul 2013 12:43 PM

By Michael Kling

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China has replied dismissively to the IMF's warning that its debt is unsustainable without major reforms, reports the UK-based Telegraph.

Rapid credit expansion, the rise of nontraditional finance, and a lack of regulations threaten China's financial stability, the IMF warns in a new report.

China is too reliant on investment and credit, which has created dangers in its financial sector, local government finances, and real estate.

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Beijing responded by stating that "vulnerabilities were well under control," according to the Telegraph. Fast growth of nontraditional wealth products and trusts are a healthy sign of "market-based intermediation," Chinese leaders say. Bad loans in the banking system "remained low and Chinese banks had some of the highest capital and provisioning ratios in the world."

"Do you laugh or cry?" writes Telegraph columnist Ambrose Evans-Pritchard.

Total credit has grown from 129 percent to 195 percent of GDP since 2008.

"The great mistake, plainly, was to keep the foot on the floor in 2010 and 2011, long after the Lehman crisis had subsided."

"We need to find ways to let the bubble burst and write off the losses we already have as soon as possible to avoid an even bigger crisis," said reformer Xia Bin from China's Development Research Center, the Telegraph reported. "It means hard days, it means the bankruptcy of some companies and financial institutions. Above all it means reform."

China as announced reform plans to contain risk, the IMF concedes. But it must follow through with specific actions. Accelerating reform is critical to avoid a sharp correction down the road, but this may entail a moderate slowdown as the economy adjusts, the IMF says.

"Progress with rebalancing has been limited and is becoming increasingly urgent," its report states. "A decisive shift toward a more consumer-based economy has yet to occur."

Fitch Ratings has already warned that China may be facing the worst-ever credit bubble.

Its problem is its opaque shadow banking system of trusts, wealth-management funds, and offshore vehicles that allow companies to avoid regulations and hide large amounts of debt.

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"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, Fitch's senior director in Beijing, according to The Daily Telegraph.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling."

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