IMF warns of 3 threats to Chinese economy

IMF warns of 3 threats to Chinese economy

 

 

China has witnessed an overall continued and impressive economic growth but is currently undertaking “a necessary but prolonged economic transformation.”

 

The most populous country in the world is “transitioning from an economic model based on exports and investment to a more sustainable one based on services and consumption,” according to the IMF’s newest report on China, indicating that its financial system has made the high growth rate along with the “consequent sharp decline in poverty rates” possible.

 

The IMF, however, noted that China’s economic transformation “requires a fundamental change” in the role played by its financial system, whose historic role was to channel the country’s high savings at low cost to strategic sectors.

 

Over the past few years, Chinese monetary and fiscal policies, which were meant to support employment and growth, have been “expansionary”, according to the IMF’s report.

 

“Pressures to keep non-viable firms open—rather than allowing them to fail—are strong, particularly at the local government level, where these objectives, at times, conflict with financial stability,” the report said.

 

These pressures meant that credit required to generate additional growth in gross domestic product (GDP) has led to a substantial rise in credit, prompting higher corporate debt and household indebtedness at a fast pace, albeit from a low base.

 

The second factor threatening the Chinese economy is the demand for high-yield investment products amidst “strengthening oversight of the banking sector [which] has led to regulatory arbitrage and the growth of increasingly complex investment vehicles,” according to the report.

 

Meanwhile, risky lending can now be found in the “less-well-supervised parts” of China’s financial system rather than at banks, while non-bank financial institutions, such as asset managers and insurance firms “which offer a proliferation of investment products have grown even faster than the banking sector.”

 

Last but not least, the  widespread of implicit guarantees has enhanced the risks and contributed to “moral hazard and excessive risk-taking,” according to the IMF.

 

“Looking ahead, the policy objective for the financial sector should be to facilitate China’s economic transformation to a more demand-driven system, in which markets play an increasingly dominant role in resource allocation and where consequences of risk-taking are well-understood and accepted,” the IMF said.

 

 

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Source: Mubasher

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