The International Monetary Fund (IMF) on Friday expressed concern over corporate debt in China and recommended several steps the country could take to correct the problem.
"International experience, including China’s own in the 1990s, suggests that tackling a systemic corporate debt problem requires a comprehensive approach," the IMF said following an annual review of the country's economy. "Without this, individual initiatives, like debt-equity conversions, will likely fail."
Non-financial corporate domestic debt stood at 120 per cent of gross domestic product (GDP) in 2015 and is projected to grow to 127 per cent of GDP in 2016, according to the IMF.
The IMF outlined a strategy for reducing the debt, saying it would affect "swathes of people" and require "politically challenging decisions."
The measures include tightening budget constraints on state-owned businesses, restructuring or liquidating indebted firms and sharing losses among relevant parties, including the government if necessary.
The report, which follows what is known as an Article IV review of the country's economy, recommended China complement these measures with targeted social assistance for displaced workers and initiatives to help introduce new, dynamic private firms.
The report noted that growth slowed to 6.9 per cent in 2015 and is projected to decline to 6.6 per cent this year owing to slower private investment and weak external demand. Inflation is expected to pick up to around 2 per cent this year.
The report said the board agreed that policies on the macroeconomic level should be "geared at lowering vulnerabilities" and acknowledged that this would likely result in "somewhat slower growth in the short term."
The IMF also welcomed the authorities' intention to rely on fiscal support if growth falls sharply in the near term. The board also "saw merit" in measures such as raising pensions, increasing social spending, providing restructuring funds and cutting minimum social security contributions.
The report said continued efforts were needed to ensure full implementation of the new budget law, improve fiscal transparency and modernize the tax system.