China's economy, fueled by credit and government debt that has increased far faster than official statistics reflect, is heading in an "unsustainable" direction that poses major risks in the years ahead, the International Monetary Fund reported Wednesday.
In one of its sharpest critiques of the world's second-largest economy, the IMF characterized China at a crossroads: nearing the limits of what it can gain from its reliance on consumer and industrial exports and in need of a dramatic round of restructuring to put more of the country's wealth in the hands of families and private businesses.
China's economic growth remains strong and is likely to remain near or above the 7.5 percent targeted by authorities. But the IMF noted growing risks in a heavily regulated financial sector that 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 what the fund termed 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.