IMF cuts China growth to 7%, says don’t stimulate


From the IMF today:

A mission from the International Monetary Fund (IMF), led by Mr. Markus Rodlauer, Deputy Director of the Asia and Pacific Department, visited Beijing, Shanghai and Shenyang from May 22 to June 5 to conduct discussions on the annual Article IV review of the Chinese economy. The mission held highly constructive discussions with senior officials from the government, the People’s Bank of China, private sector representatives, and academics to exchange views on prospects for the economy, reforms and challenges ahead. The IMF’s First Deputy Managing Director, Mr. David Lipton, joined the final policy discussions and met with Vice Premier Ma Kai, People’s Bank of China Governor Zhou Xiaochuan, China Banking Regulatory Commission Chairman Shang Fulin, China Securities Regulatory Commission Chairman Xiao Gang, and Deputy Finance Minister Zhu Guangyao. The discussions also covered the impacts of China’s policies on the rest of the world, and vice versa, in the context of the IMF’s analysis of policy spillovers from the top five systemic economies.

At the end of his visit, Mr. Lipton made the following remarks:

“We forecast China to grow by around 7½ percent this year. The improving global outlook should support exports during the second half of the year. This will help compensate for slowing domestic demand that, in part, reflects a welcome moderation in credit and investment growth. Inflation is expected to remain stable and the current account surplus is projected to be slightly smaller than last year’s.

“While the near-term outlook is thus reasonably well in hand and in line with the government’s targets for this year, our discussions with the authorities also showed broad agreement on the underlying vulnerabilities and challenges that, unless addressed, would threaten sustained rapid growth in the medium- and longer run. Since the Global Financial Crisis, activity has been too dependent on credit and investment, including in real estate. While this has supported growth in China—and provided a welcome boost to global demand—it is not sustainable and the cause of rising vulnerabilities. Over the past year, the authorities have moved on several fronts to begin addressing these vulnerabilities, such as in ‘shadow banking’ and on local government debts, and we welcome these efforts. Nonetheless, continuing reliance on credit-fueled growth means that risks are still rising, and although the government still has sufficient buffers to prevent a disorderly adjustment and sharp growth slowdown in the near-term, continued efforts to reduce vulnerabilities are a high priority.

“Last November’s Third Plenum reform blueprint marked the start of a new chapter in China’s development. It lays out an ambitious and comprehensive agenda of reforms that, if implemented, will ensure that China can achieve the fastest sustainable growth and continue its convergence toward high-income status. The challenge now is to translate this agenda into specific policies and measures, and implement them. The authorities explained the important steps that have already been taken, such as measures to rein in excessive growth in certain shadow banking activities and to strengthen control of local government borrowing. At the same time, we agreed that much remains to be done, and our discussions focused on several priorities:

“Among fiscal reforms, strengthening local government finances is a key challenge. This includes better aligning local revenues with expenditure, as well as improving management and oversight of local government borrowing as envisaged in the new pilot framework. Tax reforms can help protect the environment while promoting more efficient and inclusive growth. These include relying less on high and regressive social contributions, and more on the personal income tax; extending VAT to services; and implementing a property tax.

“Continued progress with financial sector reforms is critical to reducing vulnerabilities and supporting market-based job creation, investment, and growth. In particular, widespread implicit guarantees—of savers, intermediaries, and borrowers—and the cap on deposit rates contribute to distortions in the pricing of risk and borrowing costs. With lending rates now liberalized and more savings vehicles in the market, conditions are ripe for the next step in deposit rate liberalization. Limited deposit insurance should be introduced as soon as possible, clarifying the perimeter of guarantees, and increasing tolerance of corporate defaults and bankruptcies is needed to establish credit discipline and tight budget constraints. In this context, it will be particularly important to follow through, on all fronts, with the blueprint’s goal of establishing a level playing field between private and state-owned enterprises (SOEs)—including properly pricing finance and other factor inputs, opening up to full and fair competition activities currently reserved to SOEs, requiring adequate dividend payments to the budget, and imposing hard budget constraints.

“Successful implementation of the reform blueprint will transition the economy away from excessive savings and increasingly inefficient investment, and also support continued external rebalancing. China’s external position is moderately stronger than the level consistent with medium-term fundamentals and desirable policies. On that basis, the real exchange rate is moderately undervalued. This view is broadly unchanged from our assessment last year. Going forward, a comprehensive set of reforms will need to be implemented to bring the current account surplus into line with fundamentals. Greater exchange rate flexibility will be a key element of this transition, and we welcome the recent doubling of the daily trading band for the renminbi. Going forward, we encourage continuing progress toward greater flexibility, such as by further widening the band, and reducing intervention so that the exchange rate can find the market-clearing level as soon as possible.

“In our discussion with the authorities on these reform challenges with the authorities, we also considered the potential impact on near-term economic activity and growth, especially of the efforts needed to rein in excessive credit growth. Clearly, finding the right mix of restraint to address risks, while avoiding too sharp a decline of growth, will be an ongoing challenge. We consider that vulnerabilities have risen to the point that containing them should be a priority, and therefore additional stimulus should only be deployed if growth slows significantly below this year’s target. For next year, a target range for growth of around 7 percent, with a somewhat lower bound, would be consistent with the goal of transitioning to a sustainable growth path.

“China has had three decades of remarkable economic progress, reflecting a willingness and ability to push ahead with difficult reforms. The Chinese authorities, fully aware of the challenges ahead, have mapped out important reforms. Pressing ahead with these reforms is now key, and can bring about higher incomes and living standards in the future. That would be a development that is good for China, and good for the global economy.

“The mission would like to express its appreciation to our Chinese hosts for their hospitality extended to our team over the last two weeks.”

7% is still far too high to head off the risks that the IMF wants addressed

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.