Transcript of an IMF Economic Forum, China In The Global Economy: Prospects and Challenges
IMF News, October 19, 2004
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- Published: October 19, 2004
Overview
- Event: Transcript of an IMF Economic Forum, China In The Global Economy: Prospects and Challenges
- Location and date: Washington, DC., October 19, 2004
- Participants included IMF staff and external experts: Steven Dunaway; Albert Keidel; Moisés Naim; Eswar Prasad; Stephen Roach.
- IMF study referenced: "China's Integration into the World Economy: Prospects and Challenges" (culmination of about two years of IMF analytical work).
Trade and integration: China's rising global role
- China now accounts for "more than 6 percent of world trade."
- China’s export orientation has been matched by an increasing import push for processing trade and domestic consumption.
- China acted as a conduit: rising surpluses with the United States and the European Union have been matched "almost exactly by an increasing trade deficit that China runs with other Asian economies."
- In the early 2000s, "over the last two to three years, when the global economy was going through rather weak times, China accounted for almost a quarter of world growth in purchasing power parity terms."
Banking sector, nonperforming loans (NPLs), and fiscal risks
- Chinese banking system is "largely state-owned"; NPLs largely reflect a legacy of policy-related lending.
- The four largest state commercial banks (SCBs) "account for about two-thirds of total assets in the banking system in China" and a substantial fraction of NPLs.
- NPL ratios "have declined by almost four percentage points" in the last year (note: decline partly reflects rapid lending growth increasing the denominator).
- Official fiscal indicators: fiscal deficit "3.5 percent of GDP" and stock of public debt "25 percent of GDP."
- Implicit fiscal pressures noted: contingent liabilities from banking sector reform, unfunded pension obligations, rising social expenditures driven by aging demographics and demand for health and education.
Labor market pressures and structural reform imperatives
- Official unemployment rate "about 4 percent" masks large labor surplus and structural dislocation:
- "an estimated 150 million surplus workers in the rural sector"
- "about 10 to 12 million surplus workers in the state-owned enterprise sector"
- "about 11 to 12 million people being added annually to the working-age population"
- China’s incremental reform approach faces cross-linked challenges: banking reform, state-owned enterprise (SOE) reform, and center-local fiscal relations must be addressed simultaneously.
- Institutional reforms emphasized: legal framework, property rights, sound financial sector supervision, independent monetary policy, flexible exchange rate regime, and an efficient social safety net to cushion transitional effects from SOE restructuring and labor mobility.
Exchange rate flexibility and capital account
- IMF position: move toward "more flexibility, not necessarily a revaluation."
- Flexibility options include "a peg to a currency basket rather than just the U.S. dollar and a widening of the band around that basket."
- Emphasis on gradual move toward more flexibility; "we do not view exchange rate flexibility as synonymous with capital account liberalization."
- Policy tradeoffs highlighted:
- Allowing greater exchange rate flexibility could lead to appreciation pressures now but pressures could reverse in future.
- Given financial sector weaknesses, maintaining capital controls or selectively tightening them may help protect the financial sector during a move to more flexibility.
- De facto capital account openness (through trade invoice practices) argues for earlier exchange rate flexibility to manage speculative inflows.
Overheating, macro imbalances, and commodity impacts (views from panelists)
- Overheating concerns (presented by Stephen Roach and discussed by others):
- Indicators of overheating: very rapid industrial output growth (peaks noted historically up to "19.4 percent" year-on-year in early 2004 for industrial output), strong credit growth, rising CPI and wholesale/corporate goods prices, construction/property bubbles especially in coastal China (Shanghai).
- Suggested soft-landing industrial output band proposed by one panelist: "8- to 10-percent zone" (discussion noted that mapping this to GDP could imply lower headline GDP readings).
- Macro imbalances cited:
- Low consumption share noted: consumption "54 percent of GDP" in China compared with typical major economies.
- Service sector share "less than 35 percent of its GDP" in China.
- China's role in commodity markets: examples cited — China consumed "40 percent of the cement in the world" last year; large shares of crude oil and industrial materials noted (exact shares discussed qualitatively).
- Global implications:
- China’s import slowdown has significant spillovers for trading partners; examples for 2003 export-growth contributions to trading partners were cited (e.g., Japan, Korea, Taiwan, U.S., Germany) to illustrate sensitivity.
- Concerns flagged about recycling of foreign exchange reserves into U.S. treasuries and implications for global imbalances.
Political-economy risks: inequality, corruption, and governance
- Panelists emphasized domestic political-economy vulnerabilities:
- Rapid urbanization and infrastructure demands (12 million farmers moving to cities annually noted by one discussant).
- Rising inequality: Gini-level context cited (Gini "in the 40s" example) and rapid growth in inequality pointed out as a concern even if absolute levels differ from other regions.
- Corruption: panelists observed the IMF report’s relative silence on corruption and inequality; political risks from perceived unfairness in allocation of shortages and public goods were stressed.
- Institutional capacity imperative: managing rapid structural change requires "public administration excellence," improved fiscal federalism, stronger central presence at the local level for enforcement and protection of citizens’ rights, and legal/accounting/bankruptcy reforms to improve enterprise governance and creditor rights.
Policy recommendations and priorities (panel consensus and divergences)
- Immediate and medium-term policy priorities identified across speakers:
- Strengthen the banking-sector reform program and contain contingent fiscal liabilities related to NPLs and SOE restructuring.
- Improve institutions: legal framework, property rights, financial sector supervision, bankruptcy laws, and accounting transparency.
- Develop an efficient social safety net to manage labor-market transitions from SOEs and rural-urban migration.
- Move toward exchange rate flexibility (gradual, possibly basket-based) to gain an independent monetary policy and better absorb external shocks; decouple this from immediate full capital-account liberalization.
- Consider liberalizing deposit and lending interest rates to help curb credit-driven overheating and to incentivize commercial lending practices.
- Prioritize large-scale urban infrastructure and interregional transportation investments to facilitate productive labor mobility and urbanization as a route out of rural poverty.
- Sequence capital-account opening cautiously given mid-development stage of financial institutions; selective capital controls may be warranted during transition.
- Speed and sequencing cautioned: while reforms are necessary and interlinked, several panelists urged careful sequencing and institution-building to avoid destabilizing transitions; excessive rapid opening of the capital account while financial institutions remain weak was warned against.
Scenarios and cautions raised by panelists
- Two complementary cautions about China’s path:
- Optimistic/managed-transition scenario: simultaneous institutional, banking, SOE, fiscal, and exchange-rate reforms implemented judiciously with strong social protections could sustain high growth and reduce vulnerabilities.
- Adverse/shock scenario: delays in reforms, banking-sector stress from overinvestment and rapid credit growth, rising social and political tensions from inequality and perceived corruption, or mismanagement of exchange-rate/capital-flow transitions could produce growth-impairing shocks.
- Historical parallels and risk framing:
- Panelists noted that emerging-market crises can be "accident-prone" but recoveries have sometimes been faster than expected; however, political missteps could prolong disruptions.
Transcript of an IMF Economic Forum, China In The Global Economy: Prospects and Challenges, Washington, DC., October 19, 2004.