The International Monetary Fund has warned that China is taking ever greater risks as surging credit endangers the financial system, and called for far-reaching reforms to wean the economy off excess investment.
"China's growth has become too reliant on an unsustainable surge in credit. Failure to change course and accelerate reforms increases the likelihood of an accident or shock that could trigger an adverse 'financial-real’ feedback loop," said the Fund in its latest report on G20 imbalances.
"While China has the resources and capacity to maintain stability even in the face of an adverse shock, the margin of safety is narrowing.”
The country has relied on loan growth to keep the economy firing on all cylinders but the law of diminishing returns has set in, with the each yuan of extra debt yielding just 0.20 yuan of economic growth, compared with 0.85 five years ago. Credit of all types has risen from $9 trillion to $23 trillion in five years, pushing the total to 200pc of GDP, much higher than in emerging market peers.
There is growing concern that China is reverting to its bad old ways despite reform rhetoric, cranking up loans once again and pouring money into the giant state enterprises - known for chronic inefficiency - to keep growth alive for another cycle after two sharp slowdowns in the past 18 months.
Premier Li Keqianq said last week that the country would try to ensure solid growth to smooth the way for reforms expected at the 3rd Plenum of the Communist Party in December. But vested interests within the party appear to be fighting back against real economic change.
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"China's growth has become too reliant on an unsustainable surge in credit. Failure to change course and accelerate reforms increases the likelihood of an accident or shock that could trigger an adverse 'financial-real’ feedback loop," said the Fund in its latest report on G20 imbalances.
"While China has the resources and capacity to maintain stability even in the face of an adverse shock, the margin of safety is narrowing.”
The country has relied on loan growth to keep the economy firing on all cylinders but the law of diminishing returns has set in, with the each yuan of extra debt yielding just 0.20 yuan of economic growth, compared with 0.85 five years ago. Credit of all types has risen from $9 trillion to $23 trillion in five years, pushing the total to 200pc of GDP, much higher than in emerging market peers.
There is growing concern that China is reverting to its bad old ways despite reform rhetoric, cranking up loans once again and pouring money into the giant state enterprises - known for chronic inefficiency - to keep growth alive for another cycle after two sharp slowdowns in the past 18 months.
Premier Li Keqianq said last week that the country would try to ensure solid growth to smooth the way for reforms expected at the 3rd Plenum of the Communist Party in December. But vested interests within the party appear to be fighting back against real economic change.
Read More