IMF Offers China a Word of Advice on its Bad Loans

April 27, 2016

By Myn

IMF top China experts just warned against China’s plans to use “loan-to-equity” method to clean up the banks’ soured credits. IMF thought that China’s measure could make the issue worse unless the plan tackled the underlying issues.

In the recent report, IMF estimated that China had $1.3 trillion debt owned by companies earning less than what they owed in interest payment. Since this risk can trigger bank to lose about 7% of the country’s GDP, IMF wants China to fix it right from the first effort.

IMF said that the plan to convert loan to equity will not work as it will continue to keep “zombie firms” operating. What China needs is a comprehensive corporate restructuring strategy to shut down weak companies no matter what sectors they are in. Keeping these weak firms in operation can only lead to more losses in the future financial restructuring.

IMF’s voice is the latest addition to the crowd of opinions opposing China’s plan. Many financial regulators advised China to proceed with caution while HSBC Chief said that China needed more measures to handle the mounting bad loans. China and its bad loans are also the discussion topic of many influencers in the Sentifi crowd on Twitter.

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