China's spending could cause crisis, IMF experts warn

Economists from the International Monetary Fund have joined critics in warning that China may be overindulging in its investment binge, with potentially dangerous consequences, economically and socially.

The authors estimate that China's overinvestment in the past few years could amount to as much as 20 per cent of gross domestic product, though they settle on the figure of 10 per cent.

The authors claim: "Now, with investment to GDP already close to 50 per cent, the current growth model may have run its course … In China, a large burden of the financing of overinvestment is borne by households, estimated at close to 4 per cent of GDP per year, while SMEs are paying a higher price of capital because of the funding priority given to larger corporations."

The three authors are ultracareful and sensitive in handling the topic. Their working paper, entitled Is China Over-investing And Does it Matter?, contains the caveat that the views in the paper "do not necessarily reflect those of the IMF".

Two of the authors, Il Houng Lee and Murtaza Syed, are, respectively, the senior and the deputy resident representative of the IMF's China office, so it is hard to get more authoritative or officially close to the IMF's informed thinking.

The third author, Liu Xueyan, is a senior fellow in the institute of economic research of the National Development and Reform Commission of China, whose contribution carries the caveat that the paper does not reflect NDRC's views, either.