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China Daily Website

Debt control needed

Updated: 2013-06-03 08:20
(China Daily)

Although it is believed to be controllable, China's overall debt level could bring serious problems if its economy continues to slow down.

It is quite urgent for policymakers to strengthen debt oversight to reduce potential risks.

The International Monetary Fund warned on Wednesday that China's overall government debt is about 50 percent of its GDP, up from 40 percent in 2012 and 37.8 percent in 2011. Chinese experts and foreign investment banks have sounded similar alarms recently, although they differ over the exact scale of the debt because they use different criteria for their calculations.

They have rightly agreed that the debt level at the moment remains manageable. Japan's debt to GDP, for example, is much higher at 245 percent, while that of the United States is more than 100 percent. But what is worrying is the rate of debt accumulation. The level of debt has risen fast since the introduction of massive stimulus programs in the wake of the global financial crisis.

Official data show that in 2010, China's local government debt was about 10 trillion yuan ($1.62 trillion). Xiang Huaicheng, former minister of finance, said in April that it could now be double that. Such rapid growth means that once macroeconomic conditions change for the worse - China registered its lowest growth rate in 13 years in 2012 - there is a looming risk of large-scale defaults.

Given its still sound economic activities, China is capable of gradually absorbing the debt as the scale of its GDP expands. But its growth prospects are likely to be reduced in the coming years given the prolonged weakness of the world economy and China's economic restructuring, which is set to affect its nominal growth rates.

The IMF last week trimmed this year's growth forecast for China to 7.75 percent from 8 percent. Things could get worse if the external demand continues to weaken in the coming years.

It will be too late for policymakers to take action when the risks materialize. Therefore, the country needs to attach more importance to the issue of local government debt.

Since the scale of local government debt has not stopped increasing, it is a must for the country to rethink its debt-control policies and strengthen monitoring of the situation to prevent the eruption of any debt crisis.