Introduction

I would like to thank the Chinese Economists Society for this warm welcome. I am honored to join you today for this discussion of Sustainable Development in China and the World.

Shenzhen is a most appropriate place for this subject. The city is a symbol of China’s rapid rise to prosperity. It has gone from farmland to financial center in a generation, embodying the hopes of modernization and opportunity.

But Shenzhen is also emblematic of what it means to face China’s changing economic and financial landscape. Over the past year the city has faced unaccustomed uncertainty. Financial markets have lost ground, and rising costs have led some high-profile corporate citizens to shift operations elsewhere in China. These developments underline the challenges that must be addressed to ensure a secure future in a rapidly growing city.

The same can be said of China as it looks to achieve sustained and sustainable development. The same financial market tremors that shook Shenzhen led many Chinese to question how certain they were about China’s future path. Now some wonder what rebalancing will bring and whether issues like corporate indebtedness and financial sector weakness could alter the trajectory of China’s “new normal.”

China’s challenges are manageable. But rebalancing requires a range of actions – not just making way for the new, but also the smooth downsizing of whatever is outmoded or overbuilt. Each needs to be done in a timely fashion if China is to move along a desirable path and avoid dangerous detours. Whether you look at the history of economic transformations or the aftermath of the Global Financial Crisis, bold and determined action is rewarded—while missteps are penalized.

What I propose to do today is discuss the debt issue by taking three themes in turn:

• First, describing the IMF view of China’s economic rebalancing effort;

• Second, outlining the scale of the debt issue; and

• Third, examining some strategies for addressing corporate indebtedness in light of international experience.

My purpose is to offer the IMF’s perspective on policies that have proven effective in other countries facing issues in their development that may have relevance for China’s. I say this acknowledging that China’s situation is unique and the scale and stakes of its rebalancing unparalleled.
Rebalancing is an issue that is crucially important to China’s future—and for the global economy. We have learned over and over in the past 20 years how disruptions in one country’s economy and markets can reverberate worldwide, witness the spillovers from last year’s sudden instability in Chinese markets. The point is that any discussion of sustainable development must take into account the vulnerabilities facing a systemically important economy—and the steps needed to remedy them.

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China must act quickly to address mounting corporate debt, a major source of worry about the world's second-largest economy, a senior International Monetary Fund (IMF) official said on Saturday.

David Lipton, first deputy managing director of the IMF, warned in a speech to a group of economists in the southern city of Shenzhen that companies' indebtedness is a "key fault line in the Chinese economy."

"Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both," Lipton said, according to a copy of his prepared remarks provided to Reuters.

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“Who knows what the future holds, but China and other countries do not want to be in a situation where all their international assets are in effect dependent on the US,” said King, who was the Governor of the Bank of England from 2003 to 2013, in an article for Gold Investor magazine.

“Of course the US would not want to renege on its debts, but if some awful conflagration occurred, then all China’s assets in the US might be annulled,” said the former BoE chief, adding that China and other countries should diversify their portfolios, making them less dependent “on the goodwill of other countries.”

China is the biggest holder of US debt with $1.245 trillion, according to US Treasury data. Over the past 12 months Beijing has cut its Treasury securities 1.3 percent from $1.261 trillion seen last year.

According to the most recent data from March, global central banks sold off $17 billion in US Treasuries. Since the beginning of the year the sell-off has reached $123 billion, which is the quickest pace since 1978.

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