China’s debt issue has to be tackled according to the International Monetary Fund (IMF). The IMF warned China Friday that corporate debt must be tackled before it gets out of control.
According to the Bank for International Settlements, China has corporate debt equivalent to $25 trillion, which equates to around 254% of its GDP. The BIS, of which the Central Bank of China and the People’s Bank of China are members, is a financial institution that fundamentally brings the world’s banks together and ‘serves as a bank for central banks.’ The Federal Reserve and Bank of England are also members.
To put this into perspective, the U.S. is not much better, with a similar level of corporate debt. However, with the U.S., this level of debt has been accumulating over an extended period, whereas China’s spiralling debt is growing at a rapid speed. From 2007 to 2014 China’s debt had multiplied by four, and this rapidly quadrupled debt is causing concern. The IMF has stated that it must be addressed before it becomes uncontrollable.
It all began when China lent money heavily to help Chinese businesses out of the 2008-2012 financial crisis. China’s economy was suffering, and the borrowing helped with investment in plant and manufacturing. Much of this is now well overdue, and likely will never be repaid. The IMF is urging China to write off its bad loans and attempt to get the economy back on a level footing.
The Chinese economy, like many others, is stagnating and creating shivers in many international financial institutions. To be fair, the country has taken some steps in this direction. In an announcement earlier in the year, Beijing stated that is will be cutting 1.8 million jobs in the steel and coal industries. To offset this it is to invest $15.3 billion (100 billion yuan) in initiatives to create alternative employment for those workers who lose their jobs because of this.
The IMF has informed China that they must go further than this, and work more on the more profitable and productive aspects of its economy.
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