Update | China lacks urgency about its debt problem, IMF says from Hong Kong

The new resident representative at the International Monetary Fund’s Hong Kong office has sounded an alarm that China lacks a of sense of crisis and urgency in dealing with its current round of debt overhang that has now pushed the time companies can pay their bills to an punishing average of 72 days.

The IMF estimates that puts a total 14 per cent of all Chinese company debt at risk of becoming uncollectable. It would equate to 7 per cent of the country’s economy.

Unlike the last major debt crisis in the late 1990s, this time the risks are concentrated in China’s local banking systems, rather than their national peers, poor supervision and largely inaccessible data to monitor and control risks, the IMF said.

And given the extent that these local banks are connected with China’s new economy — local institutions have been the key lenders to private enterprises and small and medium-sized companies that power the new economic sectors —the representative warned the potential risks of local bank failures will increase and cause disruption across the whole financial system. That may bring greater capital flight and endanger China’s rebalancing efforts to transition to a high value-added economy, especially under China’s new regime that is allowing some companies go under.

“We are now looking at a long-term decline in productivity capacity for China. We are not just looking at a decline from 10 per cent growth to 6.7 per cent right now but potentially a much lower figure going forward,” said Sally Chen, resident representative at the IMF’s office in Hong Kong who arrived in the eye of the storm of yuan-led global market turmoil in January. She said the current decline in growth in China is not just cyclical but also structural.