Rising corporate debt is “a key fault line” in the Chinese economy that the country must tackle soon, a top International Monetary Fund official warned Monday.

Corporate debt represents about 145% percent of China’s gross domestic product, which is “very high by any measure,” first deputy managing director David Lipton said in a speech at a conference in Shenzhen, China.

“With the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing,” he told the China Economic Society. “This is a key fault line in the Chinese economy  . . .  And it is important that China tackles it soon.”

State-owned enterprises account for about 55% of corporate debt, far greater than their 22% share of economic output.

“These corporates are also far less profitable than private enterprises,” Lipton noted. “In a setting of slower economic growth, the combination of declining earnings and rising indebtedness is undermining the ability of companies to pay suppliers or service their debts.”

The potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7% of GDP, according to Lipton, who urged China to act quickly to address the problem.

“Company debt problems today can become systemic debt problems tomorrow,” he said. “Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both.”

As the Financial Times reports, China’s total debt rose to a record 237% of GDP in the first quarter amid massive lending designed to boost economic growth. The government has launched a series of initiatives to reduce the bad debt sitting on banks’ balance sheets, including securitization and debt-for-equity swaps, but Lipton echoed analysts who see these as having limited results.

He also pointed to the risk that China’s “debt bubble” poses to 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,” he said.

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