People's Republic of China and the IMF
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Transcript of a Teleconference Call on the 2005 Article IV Staff Report on China With David Burton, Director of the Asia-Pacific Department and Steven Dunaway, Mission Chief to China Washington, D.C. November 21, 2005
MS. BHATT: Good morning, everyone. Thanks for joining in. I'm Gita Bhatt, senior press officer with the IMF, and I want to welcome all of you to this conference call on the 2005 Article IV Staff Report on China, which was recently posted on our website.
I have here with me Mr. David Burton, who is the Director of the IMF's Asia and Pacific Department, as well as Steven Dunaway, who is the Deputy Director of the Asia and Pacific Department and the mission chief for China. Mr. Burton will make some opening remarks, and then we will take your questions.
Before we begin, let me just go over some ground rules. This is an on-the-record conference call. Mr. Burton's remarks and the contents of this call are embargoed until 15 minutes after the end of the call.
MR. BURTON: Good morning. I'd like to make a short opening statement. The overall economic situation is broadly as described in the staff report, the 2004 Article IV consultation with China that was just published. The report was discussed at the IMF's Executive Board on August the 3rd.
Since that meeting, output growth has been somewhat stronger than envisaged at that time, driven by net exports and continued robust investment and consumption. Inflation has come down as the rate of increase in food prices has fallen sharply this year. The strength in net exports has led to a widening of the current account surplus, which has replaced capital inflows as the major force behind the continued substantial accumulation of foreign exchange reserves.The increase in reserves has also added to the already high liquidity in the banking system despite sterilization efforts by the People's Bank of China (PCB).
Economic prospects continue to be broadly favorable, and our policy advice to the authorities remains essentially the same as in the staff report. Macroeconomic policies, particularly monetary policy, should continue to focus on holding investment growth in check. In particular, liquidity needs to be drained from the banking system to guard against a further resurgence in credit and investment growth.
We welcome the July 21 change in the exchange rate arrangement, which was an important step toward greater exchange rate flexibility, as we have long argued a more flexible exchange rate is in China's best interest, potentially providing more room for monetary independence, which should enhance the government's ability to manage the economy. While it is understandable that an initial period of relative exchange rate stability after the July 21st move was needed to allow the economy time to adjust and provide assurance that the change would not have significant adverse effects, subsequent movement in the exchange rate has been very limited. China's current strong economic position presents a favorable environment to allow greater exchange rate flexibility. Thus, we continue to encourage the authorities to fully utilize the flexibility afforded by the new arrangement, and we continue to work closely with them on further developing the exchange market and the exchange rate system.
Looking forward, rebalancing growth away from investment and towards consumption, and spreading the benefits of economic growth more fairly across all levels of society will be important to sustain high economic growth. Thus, we support the focus on these objectives in the recently approved 11th Five-Year plan.
Achieving these objectives will require a combination of macroeconomic policy measures and a range of structural reforms. Greater exchange rate flexibility itself would contribute to rebalancing the composition of economic growth by reducing a distortionary influence on investment decisions and potentially raising consumption by boosting households' real income. This would also help in an order resolution of global imbalances along with concerted efforts by other major economies such as the United States, Japan, and the European Union.
Over the medium term, financial sector reform will also play a central role by increasing access to credit for small and medium-size enterprises and households and by raising returns on the financial assets that households own, all of which should help to raise consumption.
In addition, rebalancing public spending towards increased outlays for health and education and infrastructure in less developed regions will also be important steps. In this context, reforms are needed in the center-local fiscal system to ensure that adequate resources are available to local governments to meet their social responsibilities. Taken together, these measures will not only help in addressing the rural-urban gap in economic opportunities and incomes, but in conjunction with pension reforms, help to boost consumption by reducing uncertainties regarding health care, education, and pensions, which have been major factors behind the high level of household savings in China.
QUESTION: I wonder if you could tell us what you thought the reason was that China seems to be unable to slow the rate of investment, as the government was hoping to do, and indeed while this seems to be accelerating, and what you think the consequences of this trend will be if it continues over the next year or so.
MR. BURTON: Thank you. Well, let me have an initial stab at that, and then I'll allow my colleagues also to elaborate a little.
The first thing I'd note is that the rate of investment has slowed substantially from the peak rate that it achieved, I believe, in early 2004. That said, it is still running pretty fast. Fixed-asset investment was running in the high 20s in recent months, which is probably too fast. It certainly means that investment is perhaps still growing as a share of GDP.
Part of the reason for the success, I think, was initially some administrative controls, but also the authorities have been successful in slowing credit growth significantly. But it's probable that they need to make somewhat more efforts in that respect.
Let me turn to my colleagues to perhaps elaborate a little on that issue. Steve?
MR. DUNAWAY: The key thing is the reason why the high level of investment growth was problematic. The big problem in late 2003, early 2004 was that the investment was concentrated in a few sectors, and the concern was that you were building up significant overcapacity in those sectors that in turn, accompanied with rapid credit growth, suggested that you could run into new problems with nonperforming loans in the banks. And so that was the major concern in terms of slowing the rate of investment.
One change as well, although the rate of investment has stayed relatively high, the composition has shifted, and it has shifted away from those sectors where we were seeing what we thought was a build-up of significant overcapacity towards sectors where previously there had been some bottlenecks, particularly in electricity production and in transportation.
QUESTION: I wanted to speak to you a little bit about the foreign exchange rate and was wondering, when you say here the subsequent movement, the exchange rate movement has been very limited, why do you think—at what rate should they be moving at around now or were you expecting?
The other question is regarding Treasury's feeling that the IMF needs to do a little bit more in pushing China towards a more flexible yuan. My question is what are, first of all, your comments about that? And what else could IMF be doing to push China towards that? And do you see that as your role?
MR. BURTON: First, on the exchange rate, movement since July 21 has been quite limited. The daily movement has been very small, and the combined movement against the dollar has been about 0.3 percent since then.
I'm not going to give you a figure for the amount by which it should move, both in total or on a daily basis. But we do see scope now for greater flexibility and utilizing more fully the flexibility allowed within the existing system, which over time could allow the exchange rate to move quite significantly over a period of weeks and months.
So I think that there is a need for the rate to respond somewhat more to market forces, and both on a day-to-day basis and I think also over time. But I'm not going to give you a figure, but I think there is scope to do more.
On our role in working with the authorities to bring about greater exchange rate flexibility, I would mention just that we have been working closely with the authorities on this issue for a long time—in fact, since as early as 1999—and encouraging them to move to a more flexible system because particularly we think it's in China's best interest to do that, and it will facilitate its balanced growth and development over the medium run. And more recently, we also think that it's in the interest of the global economy, too, and that China can play some part in addressing the issue of the global imbalances.
We've also worked with China on a number of related areas, including strengthening the financial system. We've been very active in that area for quite some time, but also in the area of fiscal policy, where I think a variety of the reforms can help to strengthen domestic demand, particularly on the consumption side, which can also help to give China a more balanced growth path, and at the same time should help with the global imbalances issue, too.
As I say, we've been working very closely with China on all those issues, and we plan and intend to continue to do so going forward. But, Steve, would you like to add anything to that?
MR. DUNAWAY: No, just to emphasize the last thing that David said. You know, as an institution, the IMF's responsibility is surveillance over the exchange rate, and we've done that and we continue to do it.
MR. BURTON: Maybe I could just add one thing, and that is, if you look at the Article IV report itself, you'll see the amount of space and analysis that was devoted to this issue in the report, and in the Public Information Notice (PIN), on the consultation discussion itself that was released on September 12th. You can also see there a full accounting of Executive Directors' views on the subject of China's exchange rate policy. So it has been extensively discussed recently, both by the staff in the report and by the Board in the Board discussion.
IMF EXTERNAL RELATIONS DEPARTMENT