The IMF Just Warned of a Potential Banking Crisis in China

October 18, 2016, 10:06 AM UTC
A Chinese flag flies near apartment buildings in Beijing on September 11, 2015. The Chinese government is capable of maintaining high economic growth, Premier Li Keqiang said on September 9, after fears the economy was slowing rocked global financial markets in recent weeks. AFP PHOTO / GREG BAKER (Photo credit should read GREG BAKER/AFP/Getty Images)
Photograph by Greg Baker—AFP/Getty Images

China’s credit growth has been “very fast” by global standards and without a comprehensive strategy to tackle the debt overhang, there’s growing risk it will have a banking crisis or sharply slower growth or both, the International Monetary Fund said.

In a working paper, the IMF said Beijing should act quickly before the problem becomes systemic, and that the problems of both creditors and debtors needed to be addressed simultaneously.

The paper is one of multiple warnings the IMF has made about the Chinese economy this year.

The fund has projected the world’s second-largest economy would grow 6.6% in 2016, but said expansion would gradually slow to around 5.8% in 2021.

Corporate China is sitting on $18 trillion in debt, equivalent to about 169% of the country’s gross domestic product.

Rating agency S&P Global has estimated China’s banks will need as much as $1.7 trillion in capital to cover a likely surge in bad loans.

In its paper dated Oct 14, the IMF said “Just cleaning up the banks by moving bad loans off bank balance sheet and recapitalizing the banks, or allowing companies to go bankrupt without recapitalizing banks would not revitalize economic activity.”

For more on business in China, watch Fortune’s video:

It said that so far, authorities had failed to implement a full-fledged strategy as China’s approach involved mainly handling the “overcapacity problem, with less discussion of financial implications.”

On Tuesday, China’s central bank said Chinese banks extended 1.22 trillion yuan ($181.3 billion) in new loans in September, a three-month high and well above expectations, while money supply growth edged up.