China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.

It is the latest red flag over China’s ballooning debt, which rose to a record 237 per cent of gross domestic product in the first quarter on the back of massive lending designed to boost economic growth.

That has put the subject to the fore of this year’s annual IMF review of the Chinese economy with a team from the Fund set to conclude its latest monitoring mission on Tuesday.

“Corporate debt remains a serious — and growing — problem [in China] that must be addressed immediately and with a commitment to serious reforms,” said David Lipton, the IMF’s number 2 and the leader of its latest mission, which ends on Tuesday.

Speaking in Shenzhen, where then-paramount leader Deng Xiaoping kicked off China’s experiments with capitalism more than three decades ago, Mr Lipton pointed to the potential risk 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, citing the global “spillovers” from last year’s turmoil in Chinese markets.

He warned that efforts to address China’s corporate debt load — which at 145 per cent of GDP was “very high by any measure” — had seen only “limited progress”.

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

Zhou Xiaochuan, governor of the People’s Bank of China, has long warned of the dangers of the corporate debt build-up, according to people familiar with the central bank’s deliberations.

In May the official People’s Daily newspaper picked up the theme, running a front-page interview with an unidentified “authoritative figure” who warned that soaring debt levels could trigger a “systemic” financial crisis.

China has since launched a series of initiatives to whittle back the bad debt sitting on banks’ balance sheets, including securitisation and debt-for-equity swaps — although Mr Lipton echoed analysts who see these as having limited resuts and doing little to eliminate bad debt from the overall financial system.

Zhang Tao, deputy governor of People’s Bank of China, speaking at a financial forum in Shanghai on Sunday, signaled a willingness to let zombie companies die. “Any industry that lacks the mechanism to elevate winners and eliminate losers can’t develop in a healthy and sustainable way,” he said.

He said an orderly system would be put in place for failed financial institutions: “We will permit financial institutions to go bankrupt in an orderly way, restructure those that need restructuring, shut those that need to be shut, and strengthen market discipline.”

Mr Lipton highlighted the state-owned enterprises, which he said were responsible for 55 per cent of the corporate debt pile despite representing 22 per cent of economic output and which “are essentially on life support”.

“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,” Mr Lipton warned. “Banks are holding more and more non-performing loans [and] the past year’s credit boom is just extending the problem.”

While concluding the issue is “manageable”, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7 per cent of GDP was a conservative estimate that excluded exposures in the “shadow banking” sector.

The risk was also that if the problem wasn’t dealt with speedily it could grow into a large crisis. “Company debt problems today can become systemic debt problems tomorrow,” Mr Lipton said. And “systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both.”