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China’s dependence on debt is growing at a “dangerous pace” and it must act to head off a brewing crisis in the world’s second largest economy, the IMF warned Tuesday.
The International Monetary Fund also said the country’s leaders should kick on with vital reforms or risk a painful correction, adding that Beijing’s “unsustainably high” growth goals were adding to the problem.
While the country has made progress in its attempts to recalibrate the driver of growth, the Fund said failure to address structural issues could destroy that work.
The IMF’s warning comes weeks after a global central bank watchdog said China’s banking sector could be facing an imminent debt crisis, fuelling worries a blowout could send tremors through the world economy.
In an update to its World Economic Outlook, the IMF said: “China continues to make progress with the complex tasks of rebalancing its economy toward consumption and services and permitting market forces a greater role.
“But the economy’s dependence on credit is increasing at a dangerous pace, intermediated through an increasingly opaque and complex financial sector.”
The IMF said China should rein in the credit growth and cut off support to “unviable” state-owned enterprises, “accepting the associated slower GDP growth”.
“By maintaining high near-term growth momentum in this manner, the economy faces a growing misallocation of resources and risks an eventual disruptive adjustment,” it said.
China’s total debt hit 168.48 trillion yuan ($25 trillion) at the end of last year, equivalent to 249 percent of national GDP, the Chinese Academy of Social Sciences, a top government think tank, has estimated.
And last month the Bank for International Settlements (BIS) – dubbed the central bank of central banks – said a gauge of Chinese debt had hit a record high in the first quarter of the year.
Its credit-to-GDP gap reached 30.1 percent in January-March, its highest level ever and far above the 10 percent level associated with risks. 
China is seeking to restructure its economy to make the spending power of its nearly 1.4 billion people a key driver for growth, instead of massive government investment and cheap exports.
But the transition is proving painful as growth rates sit at 25-year lows and key indicators continue to come in below par, weighing on the global outlook as the Chinese economy is a key driver for the world.
The economy expanded 6.7 percent in the April-June period, the same as the first three months of the year and slowing from 6.9 percent in 2015 – its weakest annual rate in a quarter of a century.
The IMF said it expected growth of 6.6 percent in 2016 – the same as its forecast in July – slowing to 6.2 percent in 2017 “absent further stimulus”.
It also said it saw inflation rising to 2.1 percent this year and three percent over the medium term as slack in the industrial sector and downward pressure on goods prices diminish.