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IMF’s Zhu Says China Has Tools to Deal With Debt Levels

The Chinese government has room to deal with rising debt levels, which has become a “serious concern,” according to Zhu Min, a deputy managing director at the International Monetary Fund.

While debt accumulation by companies and local government is “way too high,” the government has a lot of “policy buffer,” including $3.5 trillion foreign reserves, to resolve the problems, Zhu, a former deputy governor at People’s Bank of China, said at a panel during the IMF meeting in Washington yesterday. The government has already taken actions to curb borrowing, reducing the chances for an economic “hard landing,” he said.

Premier Li Keqiang said last month that China is taking “targeted measures” to address the issue of local debt, and Finance Minister Lou Jiwei has said authorities will regulate note sales to reduce credit risks. Fitch Ratings Ltd. estimates China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding the growth seen before the banking crises in Japan in the 1990s.

China’s economy, the world’s second-largest, probably will expand 7.6 percent this year, the weakest pace since 1999, according to the median estimate of economists surveyed by Bloomberg News.

A slowdown is positive as it allows the country to rebalance its economy, reducing its reliance on foreign investments, Zhu said.

Fed Tapering

Chinese officials need to prepare for the impact of the eventual withdrawal of monetary stimulus in the U.S. because the economy is much more interconnected with the global capital market than some expect, Zhu said.

External “shocks” explain 70 percent of the changes in China’s gross domestic product over the past few years, he said.

“I want to emphasize one particular point: Don’t think China is a closed market -- China is not,” said Zhu. “That means the U.S. exit from the nonconventional policies and global capital moves will also have an impact on China’s capital movements.”

Most Federal Reserve policy makers said the central bank was likely to taper its bond purchases this year, even as they unexpectedly refrained from such a move in September, minutes of their last meeting showed yesterday.

Zhu also urged the U.S. lawmakers and the White House to resolve the differences and end a week-old government shutdown. An IMF study shows that a two-week government shutdown will shave 0.25 percentage points off U.S. GDP growth, he said.

While the chance of a default is “slim,” the U.S. need to act “as soon as they can” to resolve the debt ceiling issues and reduce the uncertainties because it is weighing on the global economy, Zhu said.

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