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IMF Says Chinese Growth Built on Unsustainable Debt

IMF Says Chinese Growth Built on Unsustainable Debt

Varun Jaitly,

Talking Points:

  • IMF report warns Chinese growth is supported by unsustainable debt levels
  • Thefund warned that Chinas ability to react to financial crises may weaken
  • China expected to grow 6.7% in 2018, average 6.4% per year through 2020

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The International Monetary Fund (IMF) released a report suggesting China’s economy would grow on average 6.4 percent between 2018 and 2020, greater than prior estimates of just 6 percent. However, the IMF warns that the basis for China’s recent economic growth and further expansion is built on unsustainable rising debt levels.

Non-financial debt is expected to increase to 290 percent of GDP in 2020 from 235 percent just last year. The IMF’s warning suggests that such unsustainable debt levels would make it difficult for China to respond to financial or economic crises in the near future. The report noted that the amount of new credit required to raise GDP was far greater than what was needed in 2008, and that major sectors in the Chinese economy were using credit inefficiently.

The report also suggests that such high levels of debt could cause a “disruptive adjustment or marked slowdown” and cited numerous cases in which similar increases in non-financial debt led to a major economic crisis. The IMF acknowledged that China has made structural reforms in recent years, but noted that more was needed in order to genuinely get debt levels under control and grow the economy sustainably.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.