December 6, 2016 / 1:57 AM / a year ago

China must step up reforms to curb rising leverage, distortions: U.S. treasury official

BEIJING (Reuters) - China’s rising corporate leverage underscored the urgent need to accelerate market-oriented reforms, a U.S. Treasury official said, adding the removal of distortions in the state sector is crucial to rebalancing the world’s second-largest economy.

Nathan Sheets, the Under Secretary of the Treasury for International Affairs, said that China’s non-financial corporate sector debt - at about 145 percent of gross domestic product (GDP)- is among the highest for major economies, citing data from the International Monetary Fund (IMF).

“Rising corporate leverage reflects the still incomplete nature of China’s economic rebalancing, and underscores the urgency of China accelerating its market-oriented reforms,” Sheets said at the China Finance 40 Forum in Beijing late on Monday.

He said adopting policies to remove distortions particularly in the state sector was also critical given State-owned enterprises’ (SOEs) disproportionate share of credit.

“The elements of such reform must include removing the state guarantees and financial sector support that SOEs receive at the expense of private sector firms.”

Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of GDP.

International institutions have urged Beijing to stop financing weak firms, especially inefficient state-owned enterprises, which tend to crowd out the private sector. Earlier in the year, the International Monetary Fund warned China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it.

Over the past few years, China has remained focused on efforts to rebalance the economy from its dependence on exports to one more driven by consumption and services, though efforts to push through reforms have proven particularly challenging.

Sheets said it was important to remove the “pervasive barriers” that restrict private firms, both domestic and foreign, from participating in China’s services sector, as China looks to reduce its reliance on manufacturing in favor of services.

He said China also needs to continue to develop its capital markets, and further foster conditions to allow an orderly transition to a market-determined exchange rate.

Commenting on stimulus, Sheets said Chinese authorities had shown “some willingness” to accept a larger fiscal deficit this year to support domestic demand, but further fiscal measures that target household consumption were needed.

Reporting by Yawen Chen and Ben Blanchard; Editing by Shri Navaratnam

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