Public Information Notice (PIN) No. 12/86
July 24, 2012
On July 20, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with China.1
Background
China’s economy seems to be undergoing a soft landing, though global headwinds are increasing. GDP growth is expected to moderate to about 8 percent this year and then rise slightly to 8½ percent in 2013. Since peaking at 6½ percent in July 2011, inflation has been on a downward path to 2¼ percent in June. Price pressures have eased across all major components of the CPI basket, led by declining food inflation. Barring further shocks to agricultural supply, inflation should stay in the 3–3½ percent range this year and fall to 2½-3 percent in 2013.
The authorities’ macroeconomic policies are geared to slowing growth to a more sustainable pace, and continue to be adjusted in line with evolving conditions. The 2012 fiscal stance aims to balance the unwinding of past stimulus and supporting the slowing economy. The overall deficit is expected to be 1¼ percent of GDP, unchanged from last year in cyclically adjusted terms.2 To help support activity, implementation of approved projects is being accelerated and some measures to support energy-efficient consumption have been implemented, all of which fit within the existing budget envelope. The 14 percent M2 growth target is within reach and consistent with the authorities’ economic objectives. Monetary policy has been eased by the three cuts in banks’ reserves requirements and the June interest rate reform, which lowered benchmark interest rates and gave banks more flexibility to set interest rates. The currency has appreciated, in the year through June, by about 1¾ percent against the U.S. dollar, 7½ percent in nominal effective terms, and about 8½ percent in real effective terms (in the year through May). International reserves now stand at US$3.3 trillion.
China’s external imbalances have been reduced significantly. The current account surplus declined from a peak of 10.1 percent of GDP in 2007 to 2.8 percent of GDP last year, reflecting primarily a reduction in the trade surplus. The decline in the current account surplus has had positive spillovers to the global economy. Looking ahead, implementation of the 12th Five-Year Plan transition toward a more balanced, inclusive, and sustainable growth model will substantially boost living standards in China and contribute significantly to strong, sustained, and balanced global growth.
Executive Board Assessment
Executive Directors commended China for its robust growth that has provided an important lift to world demand during the global financial crisis. However, they noted that the pace of activity has slowed and downside risks are significant. Accordingly, Directors agreed that the key challenge for China’s policymakers in the period ahead will be to achieve a soft landing for the economy while pushing ahead with reforms for a more balanced and sustainable expansion.
Directors considered the current fiscal stance as appropriate. They welcomed the authorities’ effort to reorient the current budget to support growth, within the overall fiscal target. More broadly, Directors noted that China is well placed to respond forcefully, if needed, to a deterioration of the external environment, in particular through fiscal policy. They encouraged the authorities to direct fiscal reforms toward spurring private consumption, including through tax reforms and a stronger social safety net. Framing these policies in clear medium-term fiscal plans would help anchor expectations and ensure that the reform agenda is fiscally sustainable. Strengthening the finances of local governments should also be a priority in fiscal reform.
Directors considered the current stance of monetary policy to be consistent with the authorities’ economic objectives. They welcomed the steps taken to allow interest rates to be more market-determined, and encouraged further deployment of market-based policy instruments. Directors took note of the staff’s assessment that, notwithstanding an appreciation in real effective terms, the renminbi remains moderately undervalued against a broad basket of currencies.
Directors welcomed the progress in financial sector reforms, including on the recommendations of last year’s Financial System Stability Assessment. They stressed, nonetheless, that a large agenda remains, including strengthening the crisis management framework, adopting a formal deposit insurance scheme, and promoting the commercial orientation of banks. Directors noted the risks from rapid growth of bank credit, off-balance-sheet transactions, and nonbank financial intermediation, and encouraged continued upgrading of regulation, supervision, and monitoring of systemic risk. Reforms, including capital account liberalization, should be carefully sequenced in order to safeguard financial stability. Directors also welcomed the authorities’ efforts to cool the real estate market, and noted that eliminating the potential for property bubbles requires reforms to channel household savings away from housing and toward other financial assets.
Directors welcomed the decline in China’s external imbalances evidenced, in particular, by the lower current account surplus. However, this decline has been accompanied by rising domestic imbalances, reflected in a further rise in China’s already elevated level of investment. While acknowledging China’s large investment needs, most Directors expressed concerns about the sustainability of such a high level of investment in the context of weak external demand and excess capacity. These Directors underscored the urgency of reforms to rebalance the economy toward more consumption-led growth.
Directors encouraged the authorities to accelerate the transformation of China’s economy as envisaged under the 12th Five-Year Plan. Directors considered that the agenda should include further financial sector liberalization, expanding the services sector, strengthening the social safety net, raising factor prices, and exchange rate flexibility. Together, this reform package will raise living standards, achieve the desired rebalancing of growth, and distribute its benefits more widely.
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| Table 1. China: Selected Economic Indicators |
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2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
| |
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(Annual percentage change, unless otherwise specified) |
|
National accounts and employment |
|
|
|
|
|
|
|
|
|
Real GDP |
12.7 |
14.2 |
9.6 |
9.2 |
10.4 |
9.2 |
8.0 |
8.5 |
|
Total domestic demand |
11.4 |
12.6 |
9.7 |
14.0 |
10.6 |
10.1 |
9.4 |
9.0 |
|
Consumption |
9.8 |
11.1 |
8.5 |
9.4 |
9.2 |
9.7 |
10.1 |
9.7 |
|
Investment |
13.4 |
14.5 |
11.1 |
19.3 |
12.0 |
10.5 |
8.8 |
8.2 |
|
Fixed |
12.6 |
13.3 |
9.7 |
22.9 |
11.4 |
9.5 |
9.3 |
8.7 |
|
Inventories 1/ |
0.6 |
0.8 |
0.8 |
-0.8 |
0.5 |
0.7 |
0.0 |
0.0 |
|
Net exports 1/ |
2.1 |
2.6 |
0.9 |
-3.5 |
0.4 |
-0.4 |
-1.0 |
-0.2 |
|
Consumer prices |
|
|
|
|
|
|
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End of period |
2.8 |
6.5 |
1.2 |
1.9 |
4.6 |
4.1 |
3.5 |
2.5 |
|
Average |
1.5 |
4.8 |
5.9 |
-0.7 |
3.3 |
5.4 |
3.3 |
3.0 |
|
Unemployment rate (annual average) |
4.1 |
4.0 |
4.2 |
4.3 |
4.1 |
4.1 |
4.1 |
4.1 |
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(In percent of GDP) |
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External debt and balance of payments |
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|
|
|
|
|
|
|
Current account |
8.6 |
10.1 |
9.1 |
5.2 |
4.0 |
2.8 |
2.3 |
2.5 |
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Trade balance |
8.0 |
9.0 |
8.0 |
5.0 |
4.3 |
3.3 |
2.4 |
2.0 |
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Exports of goods |
35.7 |
34.9 |
31.7 |
24.1 |
26.7 |
26.1 |
24.3 |
23.9 |
|
Imports of goods |
27.7 |
25.9 |
23.8 |
19.1 |
22.4 |
22.7 |
21.9 |
21.9 |
|
Gross external debt |
12.5 |
11.1 |
8.6 |
8.6 |
9.3 |
10.4 |
11.4 |
12.3 |
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Saving and investment |
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Gross domestic investment |
43.0 |
41.7 |
44.0 |
48.2 |
48.2 |
48.6 |
48.5 |
48.2 |
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National saving |
51.6 |
51.9 |
53.2 |
53.5 |
52.2 |
51.3 |
50.8 |
50.7 |
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Public sector finance |
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General government gross debt |
16.2 |
19.6 |
17.0 |
17.7 |
33.5 |
25.8 |
22.0 |
19.4 |
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General government balance |
-0.7 |
0.9 |
-0.7 |
-3.1 |
-1.5 |
-1.2 |
-1.3 |
-1.0 |
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(Annual percentage change) |
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Real effective exchange rate |
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Annual average |
1.6 |
3.9 |
9.2 |
3.4 |
-0.5 |
2.7 |
… |
… |
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End of period |
-0.9 |
4.8 |
12.5 |
-4.9 |
4.5 |
6.0 |
... |
... |
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Sources: CEIC Data Co., Ltd.; and IMF staff estimates and projections.
1/ Contribution to annual growth in percent. |
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
2 This is based on staff definitions, which adjust the official figures for a few items; the main one being net transfers to the stabilization fund.
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| Table 1. China: Selected Economic Indicators |
| |
| |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
| |
|
|
(Annual percentage change, unless otherwise specified) |
|
National accounts and employment |
|
|
|
|
|
|
|
|
|
Real GDP |
12.7 |
14.2 |
9.6 |
9.2 |
10.4 |
9.2 |
8.0 |
8.5 |
|
Total domestic demand |
11.4 |
12.6 |
9.7 |
14.0 |
10.6 |
10.1 |
9.4 |
9.0 |
|
Consumption |
9.8 |
11.1 |
8.5 |
9.4 |
9.2 |
9.7 |
10.1 |
9.7 |
|
Investment |
13.4 |
14.5 |
11.1 |
19.3 |
12.0 |
10.5 |
8.8 |
8.2 |
|
Fixed |
12.6 |
13.3 |
9.7 |
22.9 |
11.4 |
9.5 |
9.3 |
8.7 |
|
Inventories 1/ |
0.6 |
0.8 |
0.8 |
-0.8 |
0.5 |
0.7 |
0.0 |
0.0 |
|
Net exports 1/ |
2.1 |
2.6 |
0.9 |
-3.5 |
0.4 |
-0.4 |
-1.0 |
-0.2 |
|
Consumer prices |
|
|
|
|
|
|
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End of period |
2.8 |
6.5 |
1.2 |
1.9 |
4.6 |
4.1 |
3.5 |
2.5 |
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Average |
1.5 |
4.8 |
5.9 |
-0.7 |
3.3 |
5.4 |
3.3 |
3.0 |
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Unemployment rate (annual average) |
4.1 |
4.0 |
4.2 |
4.3 |
4.1 |
4.1 |
4.1 |
4.1 |
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(In percent of GDP) |
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External debt and balance of payments |
|
|
|
|
|
|
|
|
Current account |
8.6 |
10.1 |
9.1 |
5.2 |
4.0 |
2.8 |
2.3 |
2.5 |
|
Trade balance |
8.0 |
9.0 |
8.0 |
5.0 |
4.3 |
3.3 |
2.4 |
2.0 |
|
Exports of goods |
35.7 |
34.9 |
31.7 |
24.1 |
26.7 |
26.1 |
24.3 |
23.9 |
|
Imports of goods |
27.7 |
25.9 |
23.8 |
19.1 |
22.4 |
22.7 |
21.9 |
21.9 |
|
Gross external debt |
12.5 |
11.1 |
8.6 |
8.6 |
9.3 |
10.4 |
11.4 |
12.3 |
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Saving and investment |
|
|
|
|
|
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|
|
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Gross domestic investment |
43.0 |
41.7 |
44.0 |
48.2 |
48.2 |
48.6 |
48.5 |
48.2 |
|
National saving |
51.6 |
51.9 |
53.2 |
53.5 |
52.2 |
51.3 |
50.8 |
50.7 |
|
Public sector finance |
|
|
|
|
|
|
|
|
|
General government gross debt |
16.2 |
19.6 |
17.0 |
17.7 |
33.5 |
25.8 |
22.0 |
19.4 |
|
General government balance |
-0.7 |
0.9 |
-0.7 |
-3.1 |
-1.5 |
-1.2 |
-1.3 |
-1.0 |
|
|
|
(Annual percentage change) |
|
Real effective exchange rate |
|
|
|
|
|
|
|
|
|
Annual average |
1.6 |
3.9 |
9.2 |
3.4 |
-0.5 |
2.7 |
… |
… |
|
End of period |
-0.9 |
4.8 |
12.5 |
-4.9 |
4.5 |
6.0 |
... |
... |
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Sources: CEIC Data Co., Ltd.; and IMF staff estimates and projections.
1/ Contribution to annual growth in percent. |
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
2 This is based on staff definitions, which adjust the official figures for a few items; the main one being net transfers to the stabilization fund.
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