Press Conference on the Conclusion of Mission for 2017 China Article IV Consultation

June 17, 2017


David Lipton, First Deputy Managing Director

Ting Yan, Communications Officer

MR. LIPTON: Good afternoon, everyone. I'm David Lipton from the IMF. I'm here to welcome you. We've just completed our Annual Policy Dialogue here in Beijing. And what I'd like to do this afternoon, is to offer some comments for a few minutes and then I'll be happy to take questions.

China's reforms have advanced across a wide domain, and the economy continues to transition to a more sustainable growth pattern. Our discussions here over the past two weeks, focused on the policies needed to ensure the success of this transition. A transition which is vital to China's people, as well as to the rest of the world. 

And the urgency of accelerating the pace of reforms was the key subject of our discussions. Policy support especially credit and public investment, has helped China maintain strong growth. Our staff now projects growth of 6.7 percent in 2017, and average annual growth of 6.4 percent between 2018-20.

China has the potential to safely sustain strong growth over the medium term, as has been widely recognized, including in the government's reform programs, this requires deep reforms to transition the economy from the current growth model that relies on credit-fed investment and debt. It's critical to start now, while growth is strong and buffers are sufficient to ease this transition. 

The Chinese authorities are fully aware of the challenge, and have taken crucial and welcome measures in that direction. Important supervisory and regulatory action is being taken to guard against financial sector risk, corporate debt is growing more slowly reflecting restructuring initiatives and overcapacity reduction. The house-price boom is gradually being contained and excess inventory reduced. 

Local government borrowing frameworks are being improved, and the blueprint for reforming central and local fiscal relations established. The creation of new businesses has tripled since the 2014 Reform. Data weaknesses have been recognized and actions taken to improve integrity. While some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability, and address the risk that the current trajectory of the economy could eventually lead to sharp adjustment. 

This means speeding up the switch from investment to consumption, increasing the role of market forces, implementing a more sustained macro policy mix, continuing the regulatory tightening, tackling nonfinancial sector debt, and further improving the policy framework. 

Our specific recommendations build on the progress achieved and the government's existing reform agenda. Let me mention the components. In particular, China needs to further boost consumption. Continued increases in public spending on health, pensions, education and transfers to poor households, would reduce excessive precautionary savings, and combined with making the tax system more progressive and greener, would boost growth while reducing China's high income inequality, and controlling pollution. 

To increase the role of market forces, the existing reform agenda for state-owned enterprises should be accelerated, and broadened to include phasing out implicit support and increasing tolerance for default and exit, building on recent announcements, barriers to entry should be removed, especially in the highly-closed service sector.

Efforts to reduce overcapacity should have more ambitious targets, both in the coal and the steel sectors, and in other sectors, and put more reliance on market forces. A more sustainable macro policy mix would include focusing more on the quality and sustainability of growth, and less on quantitative growth targets. 

A gradual fiscal consolidation, a less accommodative monetary policy, to reduce nonfinancial sector debt the focus should be on greater recognition of losses, especially in underperforming state-owned enterprises, and zombie enterprises. Reducing the flow of new debt and increasing its efficiency requires cutting the off-budget public investment, and imposing hard budget constraints on state-owned enterprises. 

The critically important recent focus on tackling financial sector risks should continue even if it entails some financial tensions, and some slower growth. We'll have a more detailed analysis and recommendations on financial sector issues in our five-yearly Financial Sector Assessment Program Review, which we expect to be completed by the end of the year. 

The monetary policy framework should continue to be strengthened over the medium term, including by phasing out monetary targets, resuming progress towards a flexible exchange rate, and in improving communications with regards to both. While China's external position remains moderately stronger, compared to the level consistent with medium-term fundamentals, the renminbi we assess as broadly in line with fundamentals. 

Capital flow measures should be applied transparently and consistently, further capital account liberalization should be carefully sequenced with the necessary supporting reforms including an effective monetary policy framework, sound financial system and exchange rate flexibility.

The government's guidelines on reforming central and local fiscal relations are welcome. We recommend centralizing some expenditure responsibility such as social insurance, while local governments could be given more revenue-raising authority as well as sufficient debt quotas to reduce their incentive to rely on off-budget borrowing and land sales. 

And lastly, China also needs to address remaining data gaps to further improve policymaking and meet the G20 commitments. Given China's record or successful reforms in the past decades, and their strong commitment and determination, we are confident that China will continue to find its way ahead through the challenges it faces, and we wish the authorities the best success in these efforts. 

Let me end by expressing our sincere appreciation to the Chinese authorities for the hospitality, and the very productive discussions we've had over the last two weeks. There have been many, many meetings, and very intensive discussion. 

With that let me end my comments, and I'll be happy to answer some questions.

MS. YAN: Thank you all for coming to our press conference. My name is Ting Yan, Press Officer of the IMF. With David's remarks, we can now open the floor for questions. Please identify yourself and keep your questions brief. QUESTIONER: Thank you. We know that IMF recommended China to realize a flexible exchange rate, say, by end of 2018, but the recent move by PBOC would say -- I mean the twist of how to calculate the daily U.S. dollar parity rate by introducing a countercyclical factor, is kind of adds clouds to the market-oriented exchange rate reform, pledged by Beijing for a long time. What's the IMF's view of this? And what's Beijing -- its plan is during your discussion in the last two weeks? Do you think that it is still lack of communication between the PBOC and the market? Thank you. 

MR. LIPTON: Our understanding of the recent announcement was that it was an attempt by the authorities to try to be in a position to prevent any unwanted overshooting, but also maintaining the flexibility that the -- maintaining the capability to allow growing flexibility in the exchange rate. As you’ve mentioned and as I've said in my remarks, we favor the -- continuing to move in the direction of introducing more flexibility, allowing market forces to play a strong role in the determination of the exchange rate. And we believe that the authorities share that goal, and that they’ll continue to make progress in that direction. 

QUESTIONER: According to the Global Financial Stability Report that was released in April, although slowing down, that China's debt is still high, and this has raised many concerns, and as you mentioned just now, authorities are going to introduce measures in order to mitigate these risks? Can you elaborate a bit more on how you view the efforts, and has it been effective? Thank you.

MR. LIPTON: Let me separate the two subjects, which is the overall growth of credit to the non-financial economy, meaning credit to companies, credit to households. From the question of the rapid growth of the financial sector itself, the effort that we've seen over the last two months, has been a very special effort to take stock of this very rapid proliferation of institutions and new financial instruments, and try to bring the financial sector under tighter financial supervision. 

Broadening the perimeter of what's covered by supervision, trying to make sure that institutions have the capital that's required to be engaged in the activities that they are engaged in, and this has led to, we think, a very welcome tightening of financial conditions in that -- in the sector, and we hope will bring some needed disciplines there. 

That's likely to have some effect on credit, and on the economy, but the broader -- the separate question, which is how much credit the financial sector extends to the non-financial sector, to companies and to households is also an issue that has grown very substantially in the past several years, and as a result debt to GDP has risen substantially. There have been efforts to slow the pace of that growth, but as you say, the credit is still being extended, and there is now the need to tighten the flow of credit further and to make sure that over time, there is suitable deleveraging to diminish the vulnerability that we know comes from having such a high -- a large amount of credit, relative to the size of the economy. 

So, one of our suggestions is that there be attention to this subject, to the growth of credit, and to the allocation of credit, to make sure that where credit is granted, that it's backing economic activities that will be useful, that will be supportive of growth, and will permit debt to be serviced without difficulty. 

QUESTIONER: China played a big role in anchoring the region two decades ago during the Asian financial crisis, what kind of role is it playing now in the economic and monetary order or region? Thanks. 

MR. LIPTON: It's a very good question, and I'd like to address it by speaking about the role China is playing in the world. You know, this has been a time, since the global financial crisis, and increasingly in recent years, where, in some countries, especially in the U.S. and Europe, there are questions being asked about the path of globalization. 

There is some discontent with what are viewed as the negative consequences of globalization, and China and starting, I think, notably with President Xi Jinping's speech in Switzerland, at Davos, made clear for China and in a sense on behalf of emerging markets and developing countries around the world, that maintain interconnectedness is important to China, is important to other emerging market countries, and encouraged continued cooperation in the interest of growth and stability.

And I think that that's a kind of leadership role at a time when there are -- when there is a dialogue going on around the world about the path of globalization. Now, I think that that's been a -- that rallying cry has been picked up by other countries. At our Spring Meetings in Washington, many emerging market countries, low-income countries, expressed to us as well their eagerness to see the IMF play its mandated role, which is to bring countries together to have dialogue to cooperate in the interest of maintaining the interconnectedness of the world, and in doing so, create opportunities for trade, for investment. 

And for growth that will allow poorer countries to have the pace of growth that will allow living standards eventually to rise, and eventually converge with those of the richer countries. So, I see China as playing a very supportive role to our institution, and to the mission of our institution, which is cooperation in pursuit of growth and financial stability -- and global stability. 

QUESTIONER: Just now you mentioned that China is experiencing a round of deleveraging in the financial sector, however, we are seeing that although the real economy is recovering but it is still very vulnerable. And you gave some recommendations, such as further tightening the credit issuance, or some policies. What will these recommendations or policies, once adopted, have some impact on the real economy? Thank you.

MR. LIPTON: First, as I say, I think there are two subjects. First, the very extensive proliferation of institutions, non-bank financial institutions, and the proliferation of new financial products, wealth management products, and the complexity of interconnections between institutions, institutions lending to, or investing in other financial institutions, has led to a very rapid growth of financial assets, bank and other financial assets are now -- are quite high, multiple of the size of the economy, and the rapid growth and the complexity of the system has become a risk.

I think that's been recognized by the Chinese authorities, and the effort that began a few months ago, through the supervising agencies, the CBRC, CSRCs, CIRC, and as well, the People's Bank of China, is an attempt to try to slow that growth, rationalize the financial sector and make sure that everyone is being monitored properly and is behaving in a safe way. I think that's an important initiative intended to try to make the banking system, and the non-banks stick together.

The second issue is, of course, how much credit that whole system provides to local governments, to companies, to households, which of course affects the debt that those parts of the economy will have to pay back.

Now, it's surely the case that tightening in both of those respects can have effect on the economy; but if it's done carefully; if a credit that might be going right now to entities that do not use their credit well that may in the future find that they have difficulties in repaying the credit, it really is a net benefit to the economy to be cutting back on the extent of those credits; and we think that if there is some sacrificing growth, it will be well worthwhile in avoiding risks of interruption of growth in the future.

QUESTIONER: A lot of people are concerned about the monetary policy in the United States, namelyincreasing the interest rate and also cutting the balance sheet; and also reducing the taxes. So, this may increase the shortage of the liquidity. The downsizing of the balance sheet, you know, the interest rate increase as was the tax rate action. Well, this is what policies call the tightening of the liquidity. What kind of impact will this have on other countries? How can China avoid the negative impact from these policies? Thank you.

MR. LIPTON: Our assessment of the U.S. is that the momentum of the economy is strengthening, and with that gathering momentum, it's inevitable that the Fed will undertake the normalization of monetary policy, a policy that has been providing extremely large amounts of liquidity during the period after the financial crisis where inflation was very low and economic activity was quite slow.

In our view, as long as the Fed continues to follow the policy that it has which is to normalize in line with the strengthening of the economy -- what they call to be data dependent -- we think that the situation will actually be useful for the rest of the world; that the stronger U.S. economy; albeit with normalizing path for interest rates, that the U.S. will be making a contribution to the rest of the world because of the growing strength.

Now, of course, China, other Asian countries, countries around the world will have to make monetary policy by both looking at their domestic economic situation -- price and output developments -- and taking into account external circumstances, whether it's the strength of trade or the flows of capital, and the interest rate terms on which that comes about. But we don't see a reason to believe that this process of normalization will be adverse to China, to countries in Asia, or others; nothing is certain and, of course, there can be changes in sentiment in capital markets in response to the monetary policy normalization in the United States -- that's hard to predict -- but, we think on balance the process of strengthening of the U.S. economy along with this normalization should not be expected to pose a problem.

QUESTIONER: I wanted to ask if you could elaborate a little bit on the issue of non-financial sector debt; and you say there should be greater recognition of losses, especially of underperforming SOEs and zombie enterprises. Can you just explain in, you know, laymen's terms what you really mean there?

Are you saying that China should just let these companies close and withdraw support for them? My other question is on -- just as a follow-up to your comments on globalization -- China's often criticized for maintaining barriers to entry in various sectors here, undermining sort of these comments,just wondering what the IMF view is.

MR. LIPTON: Thank you; two good questions. We do believe that the Chinese economy needs always to be renewing itself, and moving away from activities that were once contributing to the economy but no longer are contributing; and to be shifting resources, investment, and attention to new drivers of growth that can, in the future, are likely to be generating higher living standards for the Chinese people.

So, there are sectors that no longer are as profitable as they once were. There are enterprises, including state enterprises, that are not as profitable as they once were. Some of these are in the steel sector, or in the coal sector; some like the coal sector also have the feature that they contribute to pollution and, hence, undermine the quality of the economy. And, so, yes, we believe that there should be an effort to right-size in some cases, and downsize in other cases, enterprises that are no longer contributing.

Now, there are parts of China, provinces of China where growth is dynamic, and where the downsizing or closure of state enterprise may free-up labor that is people, workers, who can easily find alternative employment because of the dynamism of their city or their region. There may be other parts of the country where much more care will have to be taken because of the social consequences of making such changes; but if you take a medium-term perspective, what will be best in terms of generating sustained increases in the living standards for Chinese people is to make sure that resources continually move to the parts of the economy where the contribution can be the greatest.

You raised a very good point on the question about globalization. You know, we had this discussion among our membership when we convened at the spring meetings, when we convened all of the finance ministers and central bank governors of all of our 190-member countries; and, I think, it became clear then that it's important for the advocates of globalization -- and we are advocates of globalization -- to acknowledge that globalization has not been perfect; that globalization has negative side effects; that some countries may take advantage of the rules, or may have some practices that disadvantage other countries. And so, you know, we've argued that if there are countries complaining about the nature of globalization, that their arguments, their complaints, should be given a full hearing. That doesn't mean that there'll be agreement on those complaints, but we think there really needs to be a dialogue in an effort, always, to be considering whether or not there are ways to improve the system; ways to take account of the negative consequences of globalization.

At the same time, we have argued that countries that believe that they need to have their complaints addressed should do so in a cooperative way; should do so understanding that even their long-run economic health depends on a vibrant global economy that's interconnected. That the United States, that Europe, will in the long run benefit tremendously from dynamism in China, in Asia, in other parts of the developing world because those will be export markets; and those will be the places to invest in the future.

So, we would like to see a continued dialogue, a continued cooperative approach, in order to make sure that globalization serves the entire membership, and that certainly means where there are legitimate concerns or complaints -- whether it's about non-tariff barriers or other issues -- that those are brought into the dialogue and into the cooperative process. 

QUESTIONER: Last year, various IMF reports suggested China needed greater coordination among its regulators and better provisioning of non-loan credit products and WMPs, etc. How influential were these IMF recommendations on the recent measures taken by the PBOC and other Chinese regulators that were focused on cracking down on risk; and was this explicitly communicated to the IMF by the Chinese regulators? And then my second question is on China's Hukousystem. I know in your statement you spoke about the need for increased market forces in China. I'm wondering whether you think China should abolish its Hukousystem so that, for example, people from rural China would be able to more easily flow into the cities. Thanks.

MR. LIPTON: Thank you. You know, we consider it to be our job to come here and try to understand the economic situation, the economic challenges, and make policy suggestions; and we offer those suggestions -- we have a dialogue about what makes sense -- we offer those suggestions as best we can and, at that point, what we say is for the authorities to consider, to accept, reject, as they see fit; and I hope that process has been useful and continues to be useful this year.

We're not experts on -- I don't feel I'm expert on the Hukou system. I know that considerations of this include a wide range of considerations. We certainly appreciate the need for changes in the development of urbanization in a rational way and a productive way, and that's going to mean that populations have to shift from one place to another. As a general matter, we prefer some liberalization, but I don't have a specific view about whether this should be done universally, selectively, or otherwise.

QUESTIONER: In last two years' report points out that government policy and pronouncement lacks policy clarity in alternating between prioritizing reform and growth. Do you think more clarity in this year, in the government policy sector? And, secondly, while China's coping with financials of debt in both financial sector and non-financial sector, I'm wondering is there any lesson we can learn from dealing with European debt crisis a couple of years ago? Thank you.

MR. LIPTON: Thank you. I mean, we understand that there's been a dialogue here for many years that continues about how to pursue reform and change to have sustained growth, but also to support steady growth without interruption, and those judgements are difficult to make. I think our view this year is that with the global economy growing and with momentum strengthening; with the Chinese economy now growing at presently at a pace of about 6.7 percent, this is a good time to be focused on reform; on structural adjustment; on developing the potential drivers of growth; and that this should be the focus of policy and should be communicated clearly. But we also understand that this does involve some judgments and possibly some tradeoffs.

As far as debt is concerned, I think, the lessons don't come quite so much from Europe as from looking across the range of emerging market countries. If you look at -- for decades -- across emerging market and some developing countries at the growth of credit and of the ratio of credit to the size of the economy -- the ratio of credit to GDP -- you can see that when that ratio rises quickly, when that ratio gets beyond certain bounds, there tend to be vulnerabilities and a greater probability of crisis; and that comes because when credit is rising quickly, when it gets very high, its actually harder and harder to ensure that the credit is backing economic activities that will actually contribute economically speaking. And, so, there's more of a chance entities borrowing and finding that they don't have the economic foundation or basis for servicing and repaying the debts.

So, I think there is international experience, ample international experience, that says this is a subject to watch over carefully, and that in the zone that China is in, it makes sense to be monitoring and to be working towards some deleveraging.

MS. YAN: Thank you. We'll have time for one last question.

QUESTIONER: Moody's capped China's sovereign rating, citing concerns of the country's step levels and potential economic slowdown. The China's Ministry of Finance swiftly responds to that, it is inappropriate; and some experts at the Moody's decision might have been a professional mistake. As you have mentioned, the Chinese economic moment is strengthening; so, do you think the timing and decision of the Moody's downgrade is tenable? Thank you.

MR. LIPTON: You know, as I said, I think, our role is to make our analysis and have a discussion about that with the Chinese authorities, eventually make our views know; and that way the assessments, the analysis, the information, the suggestions are available to one and all, including rating agencies. So, we're here doing that. We will do that when the report of our assessments is made public late in the summer and people can make their own judgments.

Thank you very much.

MS. YAN: Thank you for coming. With that, we conclude our press conference. Thank you.

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