Rapid rise in social financing raises concern about investment quality

The International Monetary Fund on Wednesday warned China to closely watch its rapidly expanding social financing, while lowering its economic growth forecast for the world's second-largest economy.

Amid weak and uncertain global conditions, the Chinese economy is expected to grow at around 7.75 percent this year, down from the IMF's April forecast of 8 percent, according to David Lipton, the fund's first deputy managing director.

"If growth were to slow sharply below this year's target, then on-budget fiscal stimulus should be used, focusing on measures that support household incomes and consumption, such as reductions in social contributions, subsidies to consumption, or targeted social safety net spending," Lipton said in Beijing.

The pace of the economy should pick up moderately in the second half of the year, as the recent credit expansion gains traction in line with a projected mild pick-up in the global economy, the IMF said in a statement released after its annual review of the economy and after discussions with Chinese senior economic officials.

A report released by the Organization for Economic Cooperation and Development on Wednesday said that China will expand 8.4 percent in 2014 after registering a 7.8 percent GDP growth this year.

Lipton said China's economy faces important challenges and in particular, the rapid growth in total social financing - a broad measure of credit - raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system.

In terms of the main policy areas of the agenda, reining in social financing growth is a priority and will require further tightening of oversight as well as improved investor accountability for investment decisions, said the IMF.

According to the central bank data, total social financing - an index that covers all loans, bond issuance and stock sales - stood at 7.9 trillion yuan ($1.27 trillion) for the first four months, compared with nearly 4.9 trillion yuan during the same period of last year.

"Too fast credit expansion might not be sufficiently useful to China," said Lipton, adding that overdependence on investment expansion has affected the financial positions of local governments.

Including local government financing vehicles, an estimate of "augmented" general government debt has risen to nearly 50 percent of GDP, with the corresponding estimate of an "augmented" fiscal deficit on the order of 10 percent of GDP in 2012, said the monetary fund.

"While part of this deficit is financed through land sales, and augmented debt is still at a well-manageable level, it is important to gradually reduce the deficit over the medium term to ensure a robust and sustainable debt profile."

"The lack of transparency in the off-balance sheet debt of local governments adds uncertainty over potential contingent liabilities from unchecked investment. Moreover, growth in non-bank credit is close to that of booms seen elsewhere," said Tom Byrne, a senior vice-president at Moody's Investors Service.

The rating agency revised China's rating outlook to stable from positive on April 16. Lipton said the margins of safety are narrowing and a decisive impetus to reform is needed to contain vulnerabilities and move the economy to a more sustainable growth path.

Further liberalization of financial markets could make governments and private companies take efficiency more into account when they add leverage, he added.

Inflation is forecast to end the year at around 3 percent, and the external current account surplus is projected to remain broadly unchanged at around 2.5 percent of GDP, said the IMF.

It said the yuan is still considered to be moderately undervalued relative to a basket of currencies.

Increasing capital inflows have pushed up the exchange rate of the yuan in recent months. It has gained about 1.4 percent against the US dollar since April, exceeding its pace of appreciation throughout 2012.

wangxiaotian@chinadaily.com.cn

(China Daily USA 05/30/2013 page13)