The relationship between China and the US was easy to understand until the credit crunch upended the world financial order: Chinese workers lent money to American consumers who spent it. That simple equation looks more complicated after the IMF's recent downgrade of China's GDP growth this year to 7.75 per cent, which counts as a recession for an economy that needs to grow at 8 per cent a year. In fact, the IMF is concerned that the rapid expansion of credit in the country has caused a worrying switch away from lending money to Americans, to badly conceived internal financing.
The IMF's concerns relate to the growth of shadow banking, itself a consequence of the easy credit boom the Chinese government unleashed to counter the effects of the 2009 downturn. As a result, the true value of debts owed by regional governments and state-owned enterprises may be drastically under-stated. In addition, the imbalance towards the property sector and local government spending could start to seriously affect growth unless the Chinese government undertakes sizeable structural reforms that open several protected industries to greater competition, according to the agency.
