Chinese companies' indebtedness worries IMF

By

Matthieu Guinebault

Published
Aug 18, 2016

The International Monetary Fund (IMF) has called on the Chinese government to react "very urgently" and stop the massive level of indebtedness of Chinese companies, which resorted to debt to boost their growth, resulting in a high degree of financial fragility.
 

The International Monetary Fund (IMF) has called on the Chinese government to react "very urgently" and stop the massive level of indebtedness of Chinese companies, which resorted to debt to boost their growth. This has resulted in a high degree of financial fragility.
 
Outside of the financial sector, last year Chinese companies' debt was equivalent to 120% of GDP, and it is expected to reach 140% in 2019. This huge increase in indebtedness is the direct result of a move towards consumption and services, which has notably pushed the industrial sectors to invest in order to expand production.

This happened in textile and apparel, where the minimum wage increase decided by Beijing to boost consumption induced companies to manufacture more upmarket goods. This has required massive investment in textile machinery over the course of last few years.
 
The Chinese government has also expressed its concern about the growing credit problem, notably in the case of state enterprises. The leadership however wishes above all not to give rise to social imbalances, since new legislation in the field could potentially cause severe job losses.