(Yicai Global) June 16 -- China may form a dedicated government department to control the risk from mounting corporate debt in the world's second-largest economy after Mr. David Lipton, first deputy managing director of the International Monetary Fund, made the suggestion this week.
Corporate liabilities equal about 145 percent of the country's gross domestic product (GDP), high by any standard, according to International Monetary Fund figures. The IMF estimates state-owned enterprises account for some 55 percent of total corporate debt, well above their 22 percent share of economic output.
"We suggest setting up a sufficiently staffed working group with clear functions to push through and implement feasible SOE restructuring based on the restructuring plan currently put in place in the coal and steel sectors, and to address the associated impacts on the banking sector," Mr. Lipton said on June 12 in Shenzhen.
Mr. Lipton presented the IMF's annual assessment of China's economy in Beijing on June 14. The so-called 'Article 4' report said China has made progress on rebalancing its economy away from a growth model rooted in resource-based manufacturing, investment and exports toward one focused more on domestic-driven services and private consumption. But it also urged more aggressive action to stem the growth in credit.
The fund's report comes just a few weeks after the official People's Daily quoted an "authoritative person," meaning a senior Chinese leader, as saying that China could suffer a financial crisis and recession if policymakers rely too much on credit injections to stimulate a slowing economy.
Still, Mr. Li Yang, a member of the Chinese Academy of Social Sciences, a top government think-tank, believes a debt crisis in China is improbable for two reasons. First, China boasts a high savings rate, which provides a huge buffer against the country's debt issue. Second, central, regional and local governments take on debt mainly for investment, meaning they hold a large number of quality assets, providing reliable assurance of future debt repayments.
The nation's total debt accounts for about 225 percent of GDP, according to the IMF's latest report. Specifically, government and household leverage each account for 40 percent of GDP, neither of which is high by international standards.