IMF Executive Board Concludes 2010 Article IV Consultation with ChinaPublic Information Notice (PIN) No. 10/100
July 27, 2010
On July 26, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with China1
China was hit hard by the global financial crisis. However, the authorities quick, determined, and effective policy response has helped mitigate the impact on the economy and ensured that China has led the global recovery.
Public infrastructure spending was quickly increased, taxes were lowered, the government put in place incentives to boost purchases of consumer durables, and pensions, social transfers, healthcare and education spending were all raised. At the same time, interest rates and reserve requirements were lowered and limits on credit growth were removed, leading to an extraordinary surge in bank lending.
These policies were instrumental in arresting the downward momentum to both activity and confidence. Growth began to pick up in the second quarter of 2009 and reached an average for the year of 9.1 percent. Inflation moved into negative territory for much of 2009 but has since registered a modest increase, the bulk of which has been directly attributable to higher food prices. In the 12 months to May, the nominal effective exchange rate has depreciated by 1¼ percent while the real effective exchange rate has depreciated by 0.1 percent.
China’s recovery had significant positive spillovers to the region and the global economy, initially through increased demand for commodities—contributing to an upswing in global commodity prices—and later through higher imports of capital goods. The balance of payments saw a dramatic shift with the current account falling quickly as exports slowed and imports surged. Despite the lower current account, reserve accumulation has continued to be rapid.
With the recovery becoming increasingly well established, the government has begun to unwind some of its crisis response measures. Credit growth has been slowed, reserve requirements were modestly increased, and prudential requirements related to property lending were tightened. The government also announced that it was returning to the managed floating regime that had been in place from July 2005 to July 2008. Fiscal policy, however, continues to provide important support to the economy.
Executive Board Assessment
Executive Directors commended China’s proactive and decisive policy response to the global economic crisis. Growth is expected to continue to be robust, while the inflation outlook appears benign. The policy challenge now is to calibrate the pace and sequencing of exit from the fiscal stimulus and credit expansion, while making further progress in reorienting the economy toward private consumption. Directors commended the Chinese authorities for their commitment to the G-20 framework for strong, sustainable, and balanced growth.
Directors considered it appropriate that the 2010 budget maintains support for a steady resumption of private demand. They saw room for further reorientation of the stimulus package toward measures that promote private consumption, raise household income, lessen income inequality, and improve the social safety net, building on recent progress. Directors supported a gradual phase out of the fiscal stimulus in 2011, provided the current trajectory for the economy is maintained.
Directors agreed that the targeted reduction in broad money growth this year balances well the need to provide continued support to the economy with the desire to safeguard the health of bank balance sheets. They encouraged the authorities to rely more on market-based instruments to achieve this goal, including via open market operations, higher interest rates, and reserve requirements. Directors highlighted the need for regulatory and supervisory vigilance to manage any deterioration in credit quality, and for increased transparency in lending to local government financing vehicles. At the same time, it would also be important to continue to liberalize the financial system; the ongoing FSAP will provide useful guidance for the content and sequencing of the necessary reform measures.
Directors welcomed the recent decision to return to the managed floating exchange rate regime. This decision will increase the central bank’s flexibility to tighten monetary conditions. Several Directors agreed that the exchange rate is undervalued. However, a number of others disagreed with the staff’s assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus. Many Directors stressed that, over time, a stronger renminbi would help facilitate a shift from exports and investment to private consumption as the principal driver of economic growth. A number of Directors pointed to signs that a structural shift in the balance of payments is already underway, reflecting the reforms already put in place to strengthen consumption.
Directors commended the government for its pragmatic deployment of a range of countervailing prudential measures to contain property price inflation. Additional measures could be needed to address the fundamental causes of property price inflation, possibly including consideration of a property tax and broader financial market development to provide alternative savings vehicles.
Directors commended the authorities for the progress made in building a more effective system of social insurance. They encouraged further steps to improve health care, expand pension coverage, foster labor mobility, and reduce corporate savings.