IMF raises China growth outlook but warns of risk of 'disruptive adjustments'

BEIJING (Reuters) - The International Monetary Fund on Tuesday raised forecasts for China’s economic growth in 2017 and 2018, citing expectations of continued policy support, but warned of potential disruptions in the medium term unless the country reduces its reliance on rapid credit growth.

The IMF upgraded its estimate for China’s 2017 growth to 6.6 percent from 6.5 percent, which it made in January. It also raised its forecast for growth next year to 6.2 percent from the previous 6.0 percent.

While higher, the IMF estimates would equate to a significant slowdown from recent growth rates.

China’s economy grew by a faster-than-expected 6.9 percent in the first quarter of this year, fueled by robust bank lending, higher government infrastructure spending and a housing market that is showing signs of overheating.

The IMF said China has made some progress in reducing its industrial production overcapacity, but noted that the economy continues to rely on government stimulus and rapid credit expansion to maintain growth.

The report cited China’s “policy preference for maintaining relatively high GDP growth”, but warned of the consequences of unbalanced growth in the medium term.

“The resulting persistent resource misallocation, however, raises the risk of a disruptive adjustment in China in the medium term,” which could be exacerbated by continued capital outflows, the report said.

Despite vows from policymakers to rein in financial risks and pursue more sustainable growth, China continues to depend heavily on debt and public spending to drive growth.

Total new credit to the economy, which includes bank lending as well as other forms of credit, increased by a record 6.93 trillion yuan in the first quarter, data showed last week..

The Bank for International Settlements in September warned excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years.

“The longer the wait before fiscal consolidation occurs, the sharper the fiscal consolidation may have to be,” IMF chief economist Maurice Obstfeld told a news conference in Washington.

He said that while current data shows strength, the IMF believes that China’s efforts to rebalance its economy toward domestic consumption-based growth will be more sustainable with reforms to constrain the budgets of state-owned enterprises, rein in domestic credit growth and upgrade China’s financial regulation.

China’s debt-to-GDP ratio rose to 277 percent at the end of 2016 from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, according to an estimate from UBS.

The IMF raised its forecast for global growth for 2017 to 3.5 percent from 3.4 percent but left its estimate for 2018 growth unchanged at 3.6 percent.

Reporting by Elias Glenn; Editing by Kim Coghill and Chizu Nomiyama