Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: IMF Backs Rebalancing of China’s Economy

July 27, 2009

  • IMF backs Beijing’s response to global crisis
  • Rebalancing China’s economy—key to sustained strong growth
  • Positive global spillovers from reorienting of China’s economy

The IMF has praised Beijing’s swift and concerted response to the global downturn, but says China needs to adjust its economic model for continued strong growth.

IMF Backs Rebalancing of China’s Economy

Cranes at Yingkou, China. The IMF supports China’s reduced reliance on exports and increased domestic consumption (photo: Mark/epa/Corbis)

ECONOMIC HEALTH CHECK

In its 2009 assessment of the world’s third-largest economy, the IMF’s Executive Board said Beijing’s “rapid and vigorous policy response” had “served to mitigate the economic downturn and facilitate an economic recovery during the course of this year.”

China has been hit hard by the slump in worldwide demand with Beijing introducing a $586 billion stimulus package to support growth. The members of the Executive Board welcomed the substantial stimulus package and said the country’s low public debt allowed for further short-term fiscal measures to promote domestic demand.

Rebalancing

The Fund supports China’s efforts to rebalance its economy by boosting private consumption and reducing its dependence on exports and high levels of investment. It encouraged China to view the global crisis as an opportunity to promote further measures in this direction.

The IMF also welcomed China’s “recent bold efforts” to reform the provision and financing of health care, raise the public funding for education, and expand pension coverage and portability that would have an important impact in the coming years. Additional reforms in these areas would help to further “lessen the motivation behind high precautionary savings, ” said the statement.

A rebalancing of China’s economy would also help reduce global current account imbalances while generating jobs over time, particularly in the service sector. “There would be important and wide-ranging spillovers from rebalancing, with Chinese consumption becoming a key factor in driving global growth,” the IMF said.

The IMF’s Executive Board advocated a cautious liberalization of domestic interest rates and financial sector development to bolster China’s domestic demand. Interest rate liberalization would encourage greater efficiency within the banking sector by facilitating greater competition between banks, and by channeling more resources into currently underserved sectors such as small and medium-sized enterprises. It would also raise the cost of capital, help reduce the reliance on investment, and increase employment.

The IMF also said that “measures to promote capital market development would play a useful complementary role in raising household income, lowering the savings rate, boosting consumption, and improving the allocation of capital in the economy”.

The IMF Executive Board strongly welcomed China’s intention to participate in a Financial Sector Assessment Program to help identify priorities for further financial sector reform.

Exchange rate

On China’s exchange rate, many Directors on the Board believed that allowing the currency to appreciate further would support Beijing’s goals of fostering consumption and that “a further strengthening of the renminbi would be part of a comprehensive strategy to rebalance the economy”.

Some Directors “supported the view that the renminbi remains substantially undervalued.” A number of other Directors, meanwhile, considered that exchange rate appreciation should play only “a supplementary role” in supporting China’s rebalancing and should be pursued gradually.

Comments on this article should be sent to imfsurvey@imf.org