IMF warns on China's mid-term economic stability

China must take "urgent" action to reform its economy or risk "permanently lower growth", the International Monetary Fund said in a report on Friday (Aug 12).
China must take "urgent" action to reform its economy or risk "permanently lower growth", the International Monetary Fund said in a report on Friday (Aug 12). PHOTO: AFP

BEIJING (AFP) - China must take "urgent" action to reform its economy or risk "permanently lower growth", the International Monetary Fund said in a report Friday, citing mounting corporate debt as a major concern.

While near-term growth prospects remain good, Beijing's failure to move on long-promised reforms is raising the chances of a medium-term hard landing in the world's second-largest economy, it said.

China is seeking to restructure its economy to make the spending power of its nearly 1.4 billion people a key driver for growth, instead of massive government investment and cheap exports.

But the transition has caused growth to sputter. The Asian giant's economy expanded at 6.7 percent in the April-June period, the same as the first three months of the year and slowing from 6.9 percent in 2015 - its weakest annual rate in a quarter of a century.

"China's economic transition will continue to be complex, challenging and potentially bumpy, against the backdrop of heightened downside risks and eroding buffers," the IMF report said.

"Vulnerabilities are still rising on a dangerous trajectory and fiscal and foreign exchange buffers, while still adequate, are eroding," it said.

Resource misallocation, corporate debt, excess capacity and financial opacity were major problems that needed to be addressed, it specified.

"While the challenges are still manageable, urgent action is needed to ensure they remain so," it added.

While Beijing has made verbal pledges to tackle such issues, it has not followed through in practice, the report noted, saying that "government policy and pronouncements seem to alternate between prioritising reform and growth".

The report cited growing corporate debt as a particular concern.

Excluding the financial sector, it stood at around 120 per cent of GDP in 2015, estimates in the IMF document said, projecting it could grow by more than 20 points by 2021.

A June report by the China Academy of Social Sciences put the figure even higher, saying it could have already reached 156 per cent back in 2014.

The IMF said that in the mid-term, failure to move would "add to vulnerabilities, worsen resource misallocation, and lead to permanently lower growth".

Beijing has no time to lose, the Washington-based institution said, recommending that "progress should be kick-started in the next few months."

The report painted a rosier picture for China's short-term prospects, saying that stimulus measures had created a "benign" outlook. In July, the IMF upped its forecast for Chinese growth this year by 0.1 percentage points, to 6.6 percent.