Cool growth too quickly and risk a damaging contraction, with major risks for the world economy as a whole. Fail to rein in debt-fuelled spending and risk an even more serious downturn further down the road.
China´s policymakers are facing one of their biggest dilemmas of modern times.
In its latest report on the world´s second largest economy, the IMF raised China´s growth outlook. At the same time, the organisation issued an emphatic warning over rising Chinese debt levels.
The IMF used its August report on China to deliver a strong message to the country´s authorities: take decisive action now to head off a dangerous credit-fuelled boom or risk a more damaging slump in later years.
IMF economists estimate that a continuation of the Chinese government´s current economic growth strategy will see the nation´s non-financial sector debt grow to nearly three times GDP within the next five years. China´s borrowing levels already dwarf the size of its economy by more than 2.3 times.
Overall, the authors of the report believe China´s debt problems are only getting worse. The 2.9 times debt-to-GDP ratio that the organisation now expects the country to reach by 2022 is a step-up from its earlier 2.7 times debt-to-GDP ratio prediction.
Along with raising its forecast for the accumulation of debt over the coming years, the IMF has also raised its expectations for Chinese economic growth. In the short term then, more debt would appear to be good news.
The organisation upped its forecast for Chinese growth this year to 6.7% versus its earlier 6.2% estimate. It sees growth in 2018-20 at 6.4%, a 0.2% increase from its previous guidance.
However, further out, the outlook may not be so bright.
“International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” said the IMF report.
The IMF wants the Chinese authorities to instigate domestic reforms so that finance is allocated more efficiently.
In short, there needs to be stricter limits on borrowing levels and more qualified processes to make sure that loans will eventually get repaid in full.
Above all, though, the organisation believes the Chinese authorities need to stop chasing growth targets. It sees such goals as the root of the problem.
If a wall of money is just being thrown at individuals, businesses and state-sponsored enterprises to achieve preordained government growth targets, lending is hardly likely to be optimally efficient.
However, any reduction in overall lending needs to be orchestrated with care so as not to cause a sudden drop in aggregate demand.
“A precondition is to deemphasise high and hard GDP targets and the attendant excessive credit necessary to achieve these targets. To support growth while credit expansion slows, a comprehensive strategy is needed to increase credit efficiency by reducing demand for least efficient/productive uses,” said the report.