China's economy, fueled by credit and government debt that has increased far faster than official statistics reflect, is heading in an "unsustainable" direction that poses major risks in the years ahead, the International Monetary Fund reported Wednesday.
In one of its sharpest critiques of the world's second-largest economy, the IMF characterized China as at a crossroads: nearing the limits of what it can gain from its reliance on consumer and industrial exports and in need of a dramatic round of restructuring to put more of the country's wealth into the hands of families and private businesses.
China's economic growth remains strong and is likely to remain near or above the 7.5 percent targeted by authorities. But the IMF noted growing risks in a heavily regulated financial sector that is showing signs of strain, including what the fund termed "large-scale regulatory arbitrage and moral hazard" as families and businesses try to subvert the low rates of interest the government allows banks to pay on deposits. That has given rise to an explosion in what the fund termed alternative "wealth management products" — marketed by banks to attract deposits but invested in "opaque" ways that seem reminiscent of the bundled mortgages that caused the U.S. financial crisis.
In one particularly telling statistic, the IMF said that total government debt in China may be as much as double that reflected in official data, once money borrowed by local officials is taken into account.
The fund estimated that combined debt at 45 percent of China's overall economy — compared with the official government debt of roughly 22 percent of gross domestic product. The figure has been growing rapidly in recent years as local officials borrowed heavily for infrastructure and other investments pursued to keep the economy afloat.
The fund said the figure is not in itself alarming because many of the investments are backed up by tangible assets or produce income, and China itself is flush with financial resources to cover any problem. But the rapid growth and the lack of transparency are a concern.
At 45 percent of GDP, the figure is low by developed world standards, where government debt has in many cases approached or exceeded 100 percent of the size of the national economy.
But the IMF's estimate comes at a time when China's economic model is appearing increasingly constrained, whether by external factors such as the fall in demand for its exports among slower-growing developed nations or by internal problems such as pollution, unproductive investments or the unwillingness of some in the ruling Communist Party to shift more income and financial power into private hands.
The new government has pledged to speed up such changes, particularly in deregulating the financial sector so that interest rates and lending decisions are made on the basis of market dynamics rather than dictated by government policy.