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China debt crunch

IMF says China needs a way to wind down troubled banks

Fund also warns 'decreasing quality' of corporate debt after annual consulation

In its annual consultation with China, the IMF cites a need for comprehensive restructuring, in line with international best practices, to liquidate weak banks.   © Reuters

SHANGHAI -- The International Monetary Fund on Friday said China should allow lenders overburdened by bad loans to be liquidated so economic growth can be sustained in the medium term.

In a report following its annual consultation with China, the Washington-based IMF acknowledged Beijing's swift response in containing the impact of COVID-19, which allowed for a fast economic recovery.

China beat expectations and posted growth for two consecutive quarters after a sharp dip in the first quarter of 2020, driven by public sector spending as well as demand for face masks, computers and other goods.

Growth was unbalanced, the IMF noted, citing private sector spending. As such, it said, support should be directed to spur consumption to achieve balanced growth.

"At the same time, progress in real-sector reform has been slow, especially in the area of state-owned enterprises and competitive neutrality between private and state-owned firms," the IMF said in a statement.

Chinese policymakers shored up the financial system so banks could lend to businesses during the crisis. They also tolerated rising levels of nonperforming loans in select sectors and regions to mitigate the impact of the pandemic.

As the economy recovers, the IMF said, these temporary measures should be replaced with policies to address problem loans and supervisory frameworks. The IMF cited a need for comprehensive restructuring, in line with international best practices, to liquidate weaker banks.

Five provincial governments in December raised 50.6 billion yuan ($7.8 billion) through special-purpose bonds to provide liquidity to rural banks, the Beijing-based Caixin news agency reported on Thursday.

The amount is part of the 200 billion yuan that the central government approved to shore up bank capital in 18 provinces.

Baoshang Bank, Jinzhou Bank and other rural lenders received government bailouts in 2019. They were among hundreds of small banks and credit cooperatives plagued by bad loans, a situation created by excessive lending and poor credit control, according to the government.

The IMF is also concerned about corporate debt, which jumped to 130% of the gross domestic product as of end of 2020.

"The quality of this corporate debt has been decreasing," Helge Berger, the IMF's mission chief for China, told reporters in an online news conference Friday.

Some of the country's corporations, including state-owned enterprises, have come under the spotlight in recent months for defaulting on $25 billion worth of bonds in 2020.

The IMF also took note of China's assistance to low-income countries by deferring debt repayments but called for data transparency, saying it is necessary to ensure the success of global debt relief efforts.

President Xi Jinping in November told a Group of 20 summit that the country implemented debt relief measures worth $1.3 billion.

The IMF projects the Chinese economy to have grown 1.9% in 2020 and to expand 7.9% this year.

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