IMF Survey : China’s Transition to Slower But Better Growth

IMF News, August 14, 2015

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China’s growth is expected to be 6.8 percent in 2015, down from 7.4 percent last year.
The slowdown is in line with the government’s target of around 7 percent and reflects progress in addressing vulnerabilities, especially a needed moderation in real estate investment.
The recent stock market correction will not derail the ongoing adjustment to a slower yet more balanced growth path.
Key vulnerabilities identified: fiscal, real estate, financial, and corporate sectors.
Progress noted:
- Credit growth has slowed significantly over the past few years.
- Shadow banking (borrowing from nonbank financial entities) has been reined in.
- Investment is cooling, led by a reduction in residential real estate growth.
- A new budget law was passed to address off-budget borrowing.
Remaining needs:
- Further progress to put vulnerabilities on a downward path, including a decline in the level of residential real estate investment.
- Multiyear deleveraging to help close the credit gap.
- Medium-term fiscal consolidation.

Growth calibration targets recommended:
- Achieve growth of 6½-7 percent this year.
- Achieve growth of 6-6½ percent next year.
Monetary policy recommendation:
- With growth on track in the targeted range and a benign inflation outlook, monetary policy should take a wait-and-see approach.
- Significant easing risks exacerbating credit and investment vulnerabilities.
Fiscal policy recommendation:
- Fiscal policy should remain accommodative given headwinds from slowing credit and real estate investment.
- Fiscal policy should consolidate gradually from next year to put public finances on a sustainable path.
Policy trade-off highlighted:
- “Going too slow will lead to a continued rise in vulnerabilities, while going too fast risks a disorderly adjustment.”
- Structural reforms are the key to managing the trade-off and boosting potential growth.

Broad reform direction: move to a more open and market-based economy with a more decisive role for market forces.
Exchange rate policy:
- IMF recommends China can, and should, aim for an effectively floating exchange rate regime within 2–3 years.
- The new mechanism for determining the central parity of the Renminbi is a welcome step to allow market forces greater role.
Financial sector reforms:
- Advances include introduction of deposit insurance and progress in liberalizing interest rates.
- Moving to a market-based financial system requires banks to set deposit rates, lending rates, and loan policies based on market and commercial conditions to ensure access to finance for future-growth companies.
State-owned enterprise (SOE) reforms:
- Deepen reforms to level the playing field between private and public enterprises to allow private sector growth and job creation.
- Additional SOE reforms: increase dividend payments, strengthen governance, and allow exit of unviable state-owned enterprises.

Since the global financial crisis, China relied on an unsustainable growth model of excessive credit and investment; the leadership has set a comprehensive reform agenda and made considerable progress in reducing vulnerabilities.
The IMF urges acceptance of lower short-term growth to secure sustainable and stable long-term growth—a trade-off judged to be in China’s best interest.
“China is now the world’s largest economy on a purchasing power basis,” and continued implementation of necessary reforms will determine future success.
“The faster the progress, the sooner the growth-enhancing benefits will materialize.”

Source: IMF Survey, August 14, 2015.