Press Release: IMF Staff Completes the 2015 Article IV Consultation Mission to China

IMF News, May 26, 2015

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Mission led by Mr. Markus Rodlauer, Deputy Director of the Asia and Pacific Department; visited Beijing, Shanghai and Taiyuan from May 14 to 27.
IMF's First Deputy Managing Director, Mr. David Lipton, joined final policy discussions.
Meetings included Vice Premier Ma Kai, People’s Bank of China Governor Zhou Xiaochuan, and China Securities Regulatory Commission Chairman Xiao Gang.
Media contact: IMF COMMUNICATIONS DEPARTMENT, Media Relations, E-mail: media@imf.org, Phone: 202-623-7100.

Projected growth for China in 2015: 6.8 percent.
Authorities’ growth target: around 7 percent.
IMF considers appropriate growth range for 2015: 6½–7 percent.
Labor market: resilient despite slower growth, supporting household consumption.
Inflation expected to end 2015: around 1½ percent.
IMF baseline forecast for 2016: 6¼ percent growth.
IMF states policies should be prepared to allow growth to slow into the range of 6–6½ percent next year if needed to address vulnerabilities.

Since the global financial crisis, growth relied on an unsustainable mix of credit and investment, resulting in rising vulnerabilities.
Authorities have taken actions observed by staff:
- Decline in total social financing (TSF) growth.
- Tighter oversight of shadow banking.
- Moderating investment growth.
- Slowdown in real estate construction.
Nevertheless, vulnerabilities in these areas remain large and require continued, determined efforts.
Key financial-sector policy recommendations:
- Complete liberalization of deposit rates now that deposit insurance is in place.
- Move toward using interest rates as the primary tool of monetary policy by establishing a policy interest rate and using it to adjust monetary conditions and signal policy changes.
- Break the web of implicit guarantees throughout the financial system by starting a process that involves greater acceptance of defaults and bankruptcies.

Current macro-policy stance assessed as broadly appropriate and consistent with the annual growth and inflation outlook.
Fiscal policy guidance:
- If growth exceeds 7 percent, authorities should take the opportunity to reduce vulnerabilities faster.
- If growth dips below 6½ percent, fiscal policy should be eased.
- Any fiscal stimulus, if needed, should be on-budget and rely on measures that protect the vulnerable, support rebalancing, and are consistent with the reform agenda.
New budget law:
- Implementation will create a new framework for local government borrowing, improve transparency, and strengthen medium-term fiscal planning.
- Authorities should announce a clear and comprehensive transition plan for local government financing as soon as possible.
- Finding a long-term solution to the imbalance between local government spending responsibilities and revenue assignments remains a priority.
State-owned enterprise (SOE) reform:
- Progress has been too slow.
- Important reforms include increasing dividends to the budget, eliminating direct or indirect subsidies of factor costs, strengthening governance, and greater tolerance of SOE bankruptcy and exit.
- Successful SOE reforms could significantly boost productivity growth and create millions of new jobs.

China has reduced a very large current account surplus and accumulation of foreign exchange reserves in recent years.
Staff projection for 2015: China’s external position is still moderately stronger than consistent with medium-term fundamentals and desirable policies.
Exchange rate assessment:
- Substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.
- The still-too-strong external position highlights the need for other policy reforms to reduce excess savings and achieve sustained external balance.
- Going forward, the exchange rate should adjust with changes in fundamentals and, for example, appreciate in line with faster productivity growth in China relative to its trading partners.
- Authorities urged to make rapid progress toward greater exchange rate flexibility.
- Recommended objective: aim to achieve an effectively floating exchange rate within 2–3 years.
- Intervention should be limited to avoiding disorderly market conditions or excessive volatility.
SDR basket:
- Chinese authorities have stated interest in including the Renminbi in the SDR basket.
- IMF welcomes and shares this objective; as the Managing Director has said, RMB inclusion is not a matter of ‘if’ but ‘when’.

China is transitioning to a "new normal" aimed at safer and higher-quality—even if a bit slower—growth.
Key reforms to press ahead with timely implementation:
- Financial reforms (deposit rate liberalization, market-based financial system, breaking implicit guarantees).
- Fiscal reforms (on-budget stimulus if needed, new budget law implementation, local government financing transition plan).
- State-owned enterprise reform (dividend increases, subsidy elimination, governance strengthening, tolerating bankruptcy/exit).
- External sector reforms to reduce excess savings and allow exchange rate flexibility.
The Third Plenum Blueprint provides a comprehensive plan for transformation; timely implementation is critical to reduce excess savings, lower investment while making it more productive, boost consumption, and support convergence toward high-income status.

Press Release: IMF Staff Completes the 2015 Article IV Consultation Mission to China — May 26, 2015