IMF warns China on rising debt levels

The International Monetary Fund urged China on Thursday to make a priority of containing financial risks that stem for its rising debt.

Unregulated lending and local debt a risk for Beijing if growth slows

A couple in protective masks walk under haze in Shanghai, China, on Dec. 6, 2013. The IMF is warning China about its rising debt levels. (Eugene Hoshiko/Associated Press)

The International Monetary Fund urged China on Thursday to make a priority of containing financial risks that stem for its rising debt.

Beijing should avoid launching more economic stimulus unless growth drops well below this year's official target of 7.5 per cent, said the IMF's first deputy managing director, David Lipton, after meeting Chinese officials.

Rising debts owed by local governments and uncertainty about largely unregulated informal lending have fuelled concerns China's economic slowdown might cause a rise in defaults and hurt its financial system.

Chinese authorities have begun tightening controls. Lipton said Beijing still has room to prevent an abrupt slowdown in economic growth but risks are rising and regulators need to do more.

"We consider that vulnerabilities have risen to the point where containing them should be a priority," he said at a news conference.

Beijing is trying to steer the world's second-largest economy to growth based on domestic consumption instead of imports and investment following a decade of breakneck expansion.

Economic growth slowed to 7.4 percent in the three months ending in March, down from the previous quarter's 7.7 per cent.

IMF urges slower growth

Chinese leaders have ruled out further large-scale stimulus but have launched a series of targeted measures in response to weak export growth and a decline in housing prices. China's growth is reliant on massive amounts of capital investment in new production and construction.

A big portion of local government debt stems from borrowing for the multibillion-dollar stimulus that helped China rebound quickly from the 2008 global crisis.

A further growth deceleration to about seven per cent next year "would be consistent with the goal of transitioning to a sustainable growth pattern," Lipton said.

"We welcome the efforts that have been made," said Lipton. "Nonetheless, continuing reliance on credit-fueled growth means that risks are still rising."

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