Another case of Boom and Bust

IMF Getting a Little More Worried About China

By Bob Davis

While the International Monetary Fund forecasts torrid 9.5% GDP growth this year in China, the IMF is clearly getting a little more worried that China’s boom could turn to bust.

In the IMF’s Global Financial Stability Report, released on Wednesday morning, economist André Meier assessed the risk of a banking crisis in China and is less than reassuring.

A huge expansion of credit in China since 2008 helped that country prosper despite the global financial crisis. But that lending spree is may produce “significant write downs” on debts by local governments, the IMF report says, citing private sector analysis. Although Chinese government has since tried to slow the growth of traditional bank loans, “other forms of credit have surged,” the IMF said As a result, the IMF estimates, China’s domestic loans equaled 173% of GDP at the end of June 2011, which the IMF called “well above the levels of credit” for developing countries of similar income level as China.

Add to that a real estate boom, which has boosted property prices by at least 60% since the end of 2006. Measures to cool the market “might induce a sharper-than-expected correction in prices,” which could further undermine the ability of local governments to repay debt, the IMF warns. That’s because the localities rely on property sales for financing.

China has the wherewithal to bail out its banks, including $3.2 trillion in foreign exchange reserves. But the IMF says that may not be sufficient to “preclude significant bouts of uncertainty as to how losses will ultimate be allocated” among private investors and the central government. Already, the IMF notes, Chinese bank stock prices are slumping.

If the government does step in, the IMF report says, “the consequences could be a substantial worsening of China’s public debt metrics and a narrower scope for future fiscal stimulus” if the economy does slump.