China’s huge debt pile could be the trigger for the next financial crisis as borrowing reaches unsustainable levels, according to a study from the International Monetary Fund (IMF).
The IMF released its annual report on the Chinese economy, as it does with all major economies, on Tuesday, and while it revised the country’s growth outlook upwards for the next four years, the fund also issued a stark warning about rising debt levels.
“The growth outlook has been revised up reflecting strong momentum, a commitment to growth targets, and a recovering global economy,” the IMF said in its report.
“But this comes at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term.”
Credit to the non-financial sector has doubled in the last five years, the report says, and the credit to GDP ratio jumped to 230% last year.
Citing the experiences of other countries which have fuelled growth via taking on debt aggressively, the fund warned that the current trajectory of China’s debt is “dangerous.”
“International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment or a marked growth slowdown,” the report said.
The scale of China’s debt binge is revealed by the IMF, noting that to grow Chinese GDP by 5 trillion renminbi in 2015-16, it took around 20 trillion renminbi of new credit. By contrast, in 2007 it required just 6.5 trillion renminbi of borrowing to do so.
Here is the IMF’s chart showing just how rapidly debt has grown:
Actual growth that was not fuelled by borrowing was much lower than headline numbers in recent years, the report showed.
“Sustainable growth – growth that can been achieved without excessive credit expansion – was likely much lower than actual growth over the last five years,” it said.