The International Monetary Fund raised its economic growth forecast for China on Monday but warned that its financial system faces risks due to the rapid expansion of debt.
The IMF’s 0.3 percentage point increase to 7.5 percent in its growth outlook for China may help reassure investors who worry the world’s second-largest economy might be slowing too abruptly.
The forecast is in line with the ruling Communist Party’s official growth target for the year and would be the strongest for any major economy. But it is well below the double-digit levels of the past decade and might raise the risk of politically dangerous job losses.
The IMF warned that China faces the twin risks of an unexpectedly sharp slowdown and “rising vulnerabilities” in its financial system. It said both could cause repercussions for the region.
It pointed to the rapid growth of credit from sources other than traditional banks. It said the assets of such lenders have grown to the equivalent of 25 percent of the country’s annual gross domestic product.
“This represents an important source of systemic risks,” the IMF said.
Chinese regulators have tried to slow credit growth without causing the economy to stall. Total credit was 16.8 percent greater in March than a year earlier.
The IMF’s warning echoed private sector economists who say the rapid increase in China’s debt levels is similar to that of other developing countries that have gone on to suffer financial crises.
China’s total government and private debt rose to 207 percent of GDP in 2012, a 62 percent increase over 2008, according to estimates by Nomura economists Zhiwei Zhang and Wendy Chen.