China needs to address its corporate debt problem, IMF says

China's corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned. It is the latest red flag over China's ballooning debt, which rose to a record 237 per cent of gross domestic product in the first quarter on the back of massive lending designed to boost economic growth.

That has put the subject to the fore of this year’s annual IMF review of the Chinese economy with a team from the Fund set to conclude its latest monitoring mission tomorrow.

"Corporate debt remains a serious – and growing – problem [in China] that must be addressed immediately and with a commitment to serious reforms," said David Lipton, the IMF's number two and the leader of its latest mission.

Mr Lipton pointed to the potential risk to the global economy. “We have learned over and over in the past 20 years how disruptions in one country’s economy and markets can reverberate worldwide,” he said, citing the global “spillovers” from last year’s turmoil in Chinese markets.

He said efforts to address China's corporate debt load – which at 145 per cent of GDP was "very high by any measure" – had seen only "limited progress". "With the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing. This is a key faultline in the Chinese economy . . . And it is important that China tackles it soon," he said.

Mr Lipton highlighted the state-owned enterprises, which he said were responsible for 55 per cent of the corporate debt pile despite representing 22 per cent of economic output and which “are essentially on life support”. – (Copyright The Financial Times Limited 2016)