China’s economic policy came under fire Wednesday as the International Monetary Fund warned of developing risks in the country, and a group of Geneva-based officials broke off trade talks in frustration over China’s bargaining position.
Less than a week after Chinese officials pledged in Washington that the new government of President Xi Jinping would speed economic reform, the day’s events indicate the process may not be so smooth or so quick.
A new, sharply worded IMF report said that Chinese government debt has been growing faster than reported, and at 45 percent of annual economic output is perhaps double the officially recorded level. The country’s reliance on state spending, credit, and investment to prop up economic growth had become “unsustainable,” the IMF said, and needed to shift direction soon to avoid an eventual and potentially devastating crisis.
While Xi has made opening the economy a centerpiece of his plans, the events in Geneva indicate that change may come far more slowly than U.S. political and business officials hope.
Officials for a year have been discussing how to expand a global list of technology products that are traded duty-free under the 1996 Information Technology Agreement, and were aiming to conclude a deal this month.
According to officials familiar with the talks, who were not authorized to speak on the matter, China this week said that of 260 products being considered for tariff-free trade, it regarded 148 as too “sensitive” to include.
The number of products China wanted to strip from the list was double that of any other country, and would let it keep import taxes on items such as high-end medical devices that the United States is eager to sell.
“When the biggest exporter . . . has not put forward a serious offer, nobody else is willing,” said an official involved in the talks.
China, to the consternation of trading partners, has often used tariffs and other barriers to restrict imports of goods it wants to manufacture locally. The ITA, signed by 76 countries, eliminates tariffs on many high-tech goods. Updating it to expand the number of products covered is one of many trade initiatives the Obama administration has launched in an effort to boost exports.
Canadian WTO ambassador Jonathan Fried chaired negotiations on Wednesday and afterward suspended them indefinitely. Chinese officials in Geneva could not be reached for comment.
“The United States is extremely disappointed,” U.S. Trade Representative Mike Froman said in an e-mailed statement. “China’s current position makes progress impossible at this stage.”
The IMF’s critique of China was among its sharpest yet of the world’s second-largest economy. China has been a major anchor of world economic growth in recent years, but the fund characterized the country as at a crossroads — with its aging population, still centralized economic control and other forces conspiring to limit growth in coming years.
China’s reliance on consumer and industrial exports is nearing the limits of what it can do to expand the economy, the IMF said, and without a quickened and serious pace of reform, the country may be stuck for decades in the middle-income tier of nations.
“Time is running out on the current model,” the IMF study said, projecting that, absent dramatic moves to put more of the country’s wealth in the hands of families and private businesses, China’s per capita income may stall at about 25 percent of that in the United States.
In their response to the report, Chinese officials said that changes were already underway to deal with some of the issues cited by the IMF, such as the need to allow capital to flow more freely into and out of the country.
China’s economic growth is still among the fastest in the world, and it is likely to remain near or above the 7.5 percent targeted by authorities. But that is far below the average 10 percent annual growth of the past 20 years, and it could ebb even further.
The IMF emphasized that China was entering a potentially precarious period, forced to undertake major economic changes at a time when demand for its exports has lagged among slower-growing developed nations. Some of the recommended changes could cause problems of their own: China has been pushed by the United States and others to drop many of its restrictions on capital movement, for example, but the IMF estimated that such a change would likely cause a quick, one-time flow of money out of the country as Chinese investors seized the opportunity to send assets overseas.
Still, the IMF said, the current situation is also fraught. China’s heavily regulated financial sector is showing signs of strain, including what the fund termed “large-scale regulatory arbitrage and moral hazard” as families and businesses try to subvert the low rates of interest the government allows banks to pay on deposits. That has given rise to an explosion in alternative “wealth management products” — marketed by banks to attract deposits but invested in “opaque” ways that seem reminiscent of the bundled mortgages that caused the U.S. financial crisis.
While the fund said the use of these WMPs is not yet at crisis levels, it is part of an overall boom in credit, government debt and new financial products that may be outrunning the state’s capacity to adequately oversee. As with some U.S. investments that eventually rocked the financial system, the IMF said the alternative financial products being developed in China seem to carry an “implicit guarantee” that the government will make good on the promised returns or bail out any financial institution that runs into trouble.
In one particularly telling statistic, the IMF said that total government debt in China may be as much as double what is reflected in official data, once money borrowed by local officials is taken into account.
The fund estimated that combined debt comprises 45 percent of China’s overall economy — compared to the official government debt of roughly 22 percent of gross domestic product. The figure has been growing rapidly in recent years as local officials borrowed heavily for infrastructure and other investments to keep the economy afloat.
The fund said the figure is not in itself alarming, given that many of those investments are backed up by tangible assets or produce income that can pay off the debt. China is flush with financial resources to cover any problem.
However, the rapid growth and lack of transparency are of concern. Local debt is a sensitive issue in China’s closely controlled communist system because it is not clear what responsibility rests with the national government to repay it, or what happens if a major province or major state-owned company gets into financial trouble.
“We are confident we have hit the right order of magnitude” in estimating total government debt, said Markus Rodlauer, head of the IMF’s China mission. “The question out there is who in the end will be responsible. We are not answering that.”