The International Monetary Fund on Monday raised its economic growth forecast for China but warned that its financial system faces risks due to the rapid expansion of debt. However, the Fund's Asia director gave three reasons why a full-blown economic crisis is unlikely.
The IMF raised its growth forecast for China by a 0.3 percentage point increase to 7.5% while projecting that growth in Asia is projected to remain steady at 5.4% in 2014 and 5.5% in 2015 [pdf].
Changyong Rhee, director of the IMF’s Asia and Pacific Department, in an interview with The Wall Street Journal said:
1. China’s owes most of
its debt to itself. China’s total foreign debt amounts to only about
9% of its GDP, while South Korea’s was roughly one-third of GDP back in 1997.
2. China’s government debt is low. The
annual budget deficit is about 2.1% of GDP and total public debt, both owed by
the national government and China’s much more heavily indebted local
governments, at about 53% of GDP, remains low compared with Japan's gross public
debt of about 240% of GDP.
Last week, Nicholas Borst of the Washington DC-based Peterson Institute for International Economics wrote: "China is currently undergoing a new round of bank stress testing, with a drop in real estate prices certain to be amongst the variables tested. Previous stress tests, both official and unofficial, have downplayed the risks to the banks from a housing price downturn. For example, a recent report from the Bank of Communications Financial Research Center estimated that a decline in housing prices by less than 30% would have little to no impact on the non-performing loan (NPL) ratio in the banking system. Even a larger price drop of 40 to 50% would only increase the NPL ratio by 3.8 to 5.6 percentage points."
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