Photographer: Qilai Shen/Bloomberg

China's Debt-Fueled Transition May Be Dangerous, IMF No. 2 Says

  • Transition to new style of economy may be `rocky' experience
  • Structural, fiscal policy must work alongside central banks

China’s transformation to a consumer-led economy may be a “rocky” experience, according to International Monetary Fund First Deputy Managing Director David Lipton.

“China’s transition, the rebalancing, the move away from heavy industrial export sectors to growing household incomes” and consumption is “the key transition that the world’s going to observe in the coming years and it’s likely to be a rocky one,” Lipton said in an interview with Bloomberg Television on Friday. “It’s dangerous if they continue to provide credit to the old sectors, and allow debt to build.”

While China’s growth has stabilized, that’s due in part to a surge in credit. Data released by the People’s Bank of China earlier in the day showed aggregate financing, a measure of credit spanning from commercial banks to shadow lenders, totaled 2.34 trillion yuan ($361 billion) in March. The borrowing binge may create more challenges down the line unless President Xi Jinping’s government follows through on its goals of restructuring bloated state-owned enterprises and cleaning up a bad-debt encumbered banking sector.

Fiscal, Monetary

Lipton, in the interview from Washington, called for greater action and coordination of fiscal and structural policies alongside monetary policy to boost global growth.

“When monetary policy holds up the economy it simply creates room for policy makers not to take on the important structural reforms that they need to,” Lipton said in the interview with Tom Keene and Francine Lacqua. “The problem has been that monetary policy has been bearing too much of the weight, and while the use of monetary policy has held up and supported the major economies, it’s really not enough to get the economy going again.”

Central banks are reacting to sluggish growth around the globe, with the European Central Bank adding stimulus last month, the Federal Reserve agreeing to a go-slow strategy for its tightening, and the Bank of England likely postponing action until after the U.K.’s referendum on European Union membership. The IMF cut its world expansion forecast earlier this week.

“We’re not ringing alarm bells, but we think there ought to be some alert to growing financial pressures, and the vulnerabilities especially in the corporate sector in countries that have seen oil prices and commodity prices decline, where credit booms have become advanced,” Lipton said. “Certainly with the monetary policies that we see, it makes sense to be watching how risks are moving around the financial system.”

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