China Takes Flak From Foreign Finance Officials at IMF, World Bank Meetings

Surging credit growth, overcapacity in its steel industry and its bloated housing market draw widespread complaints.
By WILLIAM MAULDIN

People’s Bank of China Deputy Governor Yi Gang, left, and Bank of England Gov. Mark Carney attended a panel discussion at the International Monetary Fund and World Bank Group semi-annual Meetings in Washington on Thursday. 

WASHINGTON—Finance officials trying to avert the next global economic crisis found time at a summit here to worry about something besides Brexit and European banks: China’s mounting debts and its flagging economic overhauls.
The country’s surging credit growth, overcapacity in its steel and metals industries and its bloated housing market drew widespread complaints from finance officials and central bankers attending semiannual meetings of the International Monetary Fund and World Bank.
Officials congratulated China for its efforts to get the yuan included in the IMF’s international basket of currencies, known as special drawing rights, starting Oct. 1. 

And despite a couple of scares in the past year or so, the country’s markets and economic growth have appeared to stabilize in recent months.
But in a sign of how important the world’s second-biggest economy is to global growth, China is increasingly being called out.
U.S. Treasury Secretary Jacob Lew warned Beijing in unusually candid language about China’s overproduction and overbuilding, which he suggested could become the biggest U.S. complaint about the country, as their earlier disputes over the country’s exchange rate become less divisive.
“I’m talking about steel, I’m talking about aluminum, I’m talking about real estate—when you don’t have market forces driving investment, when you don’t have bad investments allowed to fail, you end up with resources allocated in a way that ultimately chokes the future of economic growth,” Mr. Lew said at the Peterson Institute for International Economics on Thursday.
The IMF zeroed in on a measure called current credit overhang, a widely followed international indicator of potential crises. 

The deviation of China’s credit growth from its long-term trend has surged from zero during the financial crisis to up to 27%. 

Last year, banks’ balance sheets grew to 286% of gross domestic product.
“More is needed, especially to curb excess credit growth, reduce the opacity of credit products, and ensure sound interbank funding structures,” said Peter Dattels, deputy director of the fund’s monetary and capital-markets department.
China’s policy makers are caught in a deepening trap, economists say. 

Dealing with the debt problem would require the country to start deleveraging. 

But slower credit growth is bound to hamper the overall economy. 

That could backfire by making it harder for companies to repay existing debt.
Clamping down on credit would also raise the prospect of political unrest in a country that has grown accustomed to very rapid growth. 

Faced with such unappetizing prospects, the country’s leaders have largely eschewed credit restraint in the hope that they will be able to deal with its economic problems over time.
Part of the problem is the complicated and poorly disclosed structure of the country’s swollen banking system, economists say.
“The increasing complexity, opaqueness of the shadow banking, both on the asset side, but even more on the funding side where a lot of the funding is short term, is not stable,” Markus Rodlauer, the IMF’s Asia-Pacific deputy director, told reporters on Thursday. 

“It’s still of a size that is manageable, but the trajectory is dangerous, and needs to be contained.”
China’s appetite for steel and aluminum, which shrank abruptly in the past year or so, is of vital interest to commodity-exporting economies such as Russia and Brazil. 

For now, exporters appear to be confident that demand won’t drop off again in the short term.
“China’s growth is stabilized at a lower level,” Brazilian Finance Minister Henrique Meirelles said in an interview. 

“I don’t see a further collapse coming.”
Still, much will depend on China’s economic transition.
“They are trying to alter their priority from manufacturing to services, from export-oriented to domestic consumption,” said Indian Finance Minister Arun Jaitley in an interview. 

“In the transformational stage, there will be ripples.”