Transcript of IMF Press Conference at the Conclusion of the 2013 Article IV Consultation Discussions with China

May 29, 2013

May 29, 2013
Beijing, China

David Lipton, First Deputy Managing Director;
Markus Rodlauer, Deputy Director, Asia and Pacific Department, and Mission Chief for China;
Isabelle Mateos y Lago, Assistant Director, Asia and Pacific Department;
Steven Barnett, Division Chief, Asia and Pacific Department; and
Dezhi Ma, Senior Communications Officer, Communications Department.

MR. MA: I’m Dezhi Ma with the Communications Department of the IMF. Joining me today are Mr David Lipton, the First Deputy Managing Director of the IMF; Mr Markus Rodlauer, he’s the Deputy Director of the IMF’s Asia and Pacific Department and also the Mission Chief for China; and Ms Isabelle Mateos y Lago, she’s the Assistant Director of the IMF Asia and Pacific Department and in charge of the spillover discussions with the five systemically important economies, including China; and Steven Barnett, Division Chief for China at IMF’s Asia and Pacific Department.

Without further adieu, I’m going to hand over to Mr David Lipton to make some short opening remarks. We will proceed to take your questions after that. Thank you very much.

MR. LIPTON: Thank you very much. It’s a pleasure to be back here in Beijing on the occasion of our concluding discussions with the Chinese authorities for our 2013 Article IV Consultation. The mission was headed by Markus Rodlauer who is here; as well as our discussion of our spillover report which is headed by Isabelle Mateos y Lago, who is also with us today. I’d like to start by thanking our Chinese hosts for the highly constructive and productive discussions that we’ve had and for their hospitality in welcoming our team here over the last several weeks. I had the privilege of meeting with Vice Premier Ma Kai earlier this week. I had very informative discussions with the People’s Bank of China governor, Zhou Xiaochuan; Finance Minister Lou Jiwei; National Development & Reform Vice Chairman, Liu He, and other Chinese officials over the past three days.

Let me speak a little bit about the economy and our conclusions. Despite weak and uncertain global conditions, the Chinese economy is expected to grow at around 7¾ per cent this year, and at about the same pace next year. It should pick up moderately in the course of the second half of this year, as the recent credit expansion gains traction and in line with the mild pick-up in the global economy that we expect. Inflation is forecast to end the year at around 3 per cent, and the external current surplus is projected to remain broadly unchanged at about 2½ per cent of GDP.

Notwithstanding this relatively favorable near-term outlook, China’s economy faces important challenges. In particular, the rapid growth in total social financing; that’s a very broad measure of credit creation that we’re using. That rapid growth raises questions about the quality of investment and the impact that may have on repayment capacity for companies and for local governments, especially since a fast-growing share of credit is flowing through the newer and less-well supervised parts of the financial system. While good progress has been made with external rebalancing, growth has become more dependent, perhaps too dependent, on the continued expansion of investment, much of it in the property sector and much of it involving local governments whose financial position is being affected as a result. High income inequality and environment problems are further signs that the current growth model needs to adapt.

The Chinese authorities recognize these challenges. The new government which took office in March has announced a set of reforms for 2013 to start addressing these issues. We had good discussions of their reform agenda. In those discussions, they emphasised their intention to embark on comprehensive reforms to ensure a more balanced, inclusive and environmentally friendly growth going forward. While China has significant policy space and financial capacity to maintain stability, even in the face of adverse shocks, the margins for safety are narrowing and a decisive impetus to push forward reform is needed in order to contain those vulnerabilities and move the economy to a safer and more sustainable growth path.

Our dialogue with the authorities has highlighted three broad challenges for the reform agenda. Let me talk about each of the three. First, embedding strong governance in lower-level state or state-related economic institutions, especially banks, state-owned enterprises and local governments. Each of those need improved governance. Second, they need continued liberalization and reduced government involvement, allowing a greater role for market forces in the economy. Third, a decisive push to promote rebalancing; rebalancing toward higher household incomes and higher household consumption. Overall success will depend on effective implementation of all three of these goals. For example, further liberalization of financial markets, which is a desirable end, will not bring the desired efficiency gains, even could be counterproductive in the absence of strengthened fiscal discipline for lenders, for borrowers, and greater accountability in the whole process.

In terms of the main policy areas in this reform agenda, the mission was reassured by the authorities and their focus on the financial sector, fiscal reform, measures to strengthen price signals and improve the framework for a well-functioning marketplace. Reining in total social financing and its growth is a priority that will require further tightening of prudential oversight, and will critically depend on improving investor accountability; investors needs to be accountable for their investment decisions rather than rely on a presumption that their investment returns are guaranteed by the financial institutions or by the government. These policies may slow activity in the short term, but would do so in a way that supports transition to a more sustainable growth path. If growth were to slow below this year’s target, then it would be advisable for there to be on-budget fiscal stimulus focusing on measures that would both support the economy but would do so in a way that support household incomes and consumption, and hence support rebalancing in the economy. Those measures could include reductions in social contributions, subsidies to consumption, or targeted social safety net spending.

Continued progress with interest rate liberalization and greater exchange rate flexibility will also support rebalancing, and can be accompanied by a gradual and careful opening of China’s external capital account. Our staff’s assessment of China’s external position is broadly unchanged from last year, with the renminbi considered to be moderately undervalued relative to a basket of currencies.

Fiscal reforms are also an integral part of the agenda to support rebalancing, improve governance and raise the efficiency of investment. Including local government financing vehicles, an estimate of the “augmented” general government debt has risen to nearly 50 per cent of GDP, with the corresponding estimate of the “augmented” fiscal deficit now on the order of about 10 per cent of GDP last year. While part of this deficit is financed through land sales and the “augmented” debt is still at a quite manageable level, it’s important over time to gradually reduce the deficit to ensure a robust and sustainable fiscal position and debt profile. Continuing tax reform and a comprehensive re-ordering of local government finances, realigning resources with spending needs and revamping the framework for local government investment and borrowing, those will be key elements of this effort. Shifting part of the very high social security contributions to other forms of taxation would also contribute to rebalancing by reducing the burden on low-wage earners.

A broad range of other structural reforms will support the transition to a more balanced and inclusive growth. Many of these, such as pricing of energy, land and water reforms, are already proposed by the authorities. Allowing more competition in sectors currently considered strategic will help boost growth and boost household incomes. Higher dividends paid by state enterprises to the government would improve their fiscal discipline while contributing to additional fiscal revenue that could be used to support rebalancing.

Taken together, these measures represent a challenging reform agenda. It would take strong determination and administrative capacity on the part of the government to carry out this agenda. The authorities repeatedly emphasized to us that they are fully aware of these challenges and the difficult course ahead. They are aware of the need for a decisive round of reforms to shift the economy onto a more balanced and sustainable growth path. Their success in carrying out these reforms will benefit China, will benefit the rest of the world; and that effect will be very significant given the growing importance of China in the global economy and the growing integration of China with the global economy.

Let me stop with those comments and ask if you have questions. Front row here.

QUESTIONER: Hi, a couple of questions. Firstly, it seems like you’ve downgraded your growth forecast for this year and for next year. So, it would be nice to have a couple of more words on what some of the reasons were for that downgrade. Secondly, you’re estimating “augmented” government debt of 50 per cent of GDP, and last year’s fiscal deficit at 10 per cent of GDP, if I heard you correctly. It would be nice to hear what’s sort of estimates were included in your “augmented” debt and deficit calculations. Thanks.

MR. LIPTON: This is a country where very great attention is paid to 0.1 or 0.2 per cent of growth, given the very high rate of growth. Let’s not lose sight of the fact that China is still growing at a very fast rate. It has been, it probably will be. We’re projecting that growth will remain robust. Now we are projecting, as I mentioned, growth that’s about 7¾ per cent. The change, while modest, comes essentially from looking at the global economy and the pace of growth in the global economy, and the demand that derives from that growth for Chinese exports. Chinese export has been, after years and years of very rapid growth, very slow because of the state of the world economy; and we now are taking our projections of the global economy into account.

We of course continue to look at the official fiscal positions, the official debt of the general government and the deficit of the general government, which is quite modest in its levels. But we think it’s also important to take a broader view as well. We’re not alone in that. The government themselves look at these broader indicators as do many analysts here in China. What we look at includes financing of local governments and spending of local governments around all of China; and it’s an attempt to try to incorporate those in as well. We look at it both from the standpoint of spending and revenues, and from the standpoint of finance; and the attempt here is to try and get a broader and more comprehensive view. But let me say a word or two, as I did in my opening remarks, about local government activities. There’s no question that local government activities support a huge amount of the social services in the economy, and as well carry out many local infrastructure projects - building schools, hospitals, local infrastructure and so on. We are not suggesting that these activities are problematic. In fact, it’s natural that while the economy is in a rapid growth phase, that there would deficit financing, and some support for these very important local activities. But we are trying to develop and focus on this broader measure so that over time there can be transparency and scrutiny of the broader fiscal situation to make sure that the activities that are undertaken are in the national interest and are officially undertaken.

QUESTIONER: Firstly, I’ll follow the line of my colleague here. You downgraded the GDP growth of China. At the same time, you also advised China to rein in social financing. My question is - are you expecting China to grow even slowly further if China take your advice? The second question - you touched upon the interest rate liberalization and the exchange rate regime change, and also the capital account convertibility. Do you think or are you confident, after your discussion with Chinese decision makers, that if China can calibrate all this four - banking, interest rate, exchange rate, capital account convertibility? Can China calibrate the four reforms on four fronts at the same time successfully? And if China can make it to declare that China can convert its capital account by 2015, that is the end of the Twelfth Five-Year Plan?

MR. LIPTON: Thank you. Good questions. Again, let me repeat. We’re projecting that growth in China remains at a very substantial level. Seven and three-quarter’s growth is quite rapid growth by any reasonable standard. We’re not suggesting that credit be restricted right now. What we’re suggesting is that credit growth be watched very carefully, and that there be attention both to the sources of credit and the uses of credit to make sure that the investments that are being undertaken are efficient investments and useful investments for the country. So, in essence, our view is that the fiscal and the monetary policies right now are appropriate to the circumstances, but there are risks that credit expansion could go too far, could finance investments that turn out not to be sufficiently useful for China, and that there ought to be some attention to that. You’re right in saying that there’s a multi-part agenda for liberalization: liberalization of interest rates, of the exchange rate, of the capital account, and of many prices - energy and other prices across the economy.

We’ve tried to stress, and I think it is important, that when China liberalizes, it also needs to build a strong enough governance structure so that liberalization will lead to the improvements that are warranted; and that governance structure is a very important part of the reform agenda. Governance in this country has traditionally come from the top, but there are now many actors in the economy - banks, non-bank financial institutions, state enterprises, local governments; and each has to have sufficient disciplines that when they receive resources or when they lend resources that they take care about the efficiency of the use of those resources. If governance is sufficient, then liberalization can bring about a better allocation of resources, better use of resources; and we’d like to see those two reforms - governance reforms and liberalization reforms - going hand in hand. I think the question of the timing or the sequencing of reforms is a complex one, and clearly the government is considering reforms in quite a range of areas. I think those reforms do need to advance together. It’s not as though you can simply go down one path all the way and then begin on another. There are good reasons why the liberalization in one area is supported by liberalization in another. Thank you.

QUESTIONER: In the first quarter of the year we saw total social financing rising about 58 per cent from a year earlier, whereas growth slowed from 7.9 per cent in the fourth quarter to 7.7 per cent. A lot of people are worried that that credit is going to pay off old loans. But if you look at the bad loan ratio at the banks, it is now less than 1 per cent. Do you believe that number? Do you think there’s a problem with banks reporting bad loans, their bad loan rates, their actual bad loan rates? Second question is - Japan has embarked on a monetary easing and devaluation, effective devaluation of the currency. Was there much concern from the Chinese leaders you met? Did they express much concern over that, over what Japan’s doing on that front? And do you see major negative impacts on other regional economies from what Japan is doing?

MR. LIPTON: As far as the credit growth is concerned, I think credit is flowing from traditional and new sources, and going to quite a range of uses. I don’t think we’ve identified that there’s any one user that credit is being put to. There’s clearly a lot of infrastructure investment, other forms of investments; probably as you suggest, some adjustments of corporate finance. We don’t have any reason to believe that there are any new problems that have arisen with the accounting of those credits. But we are concerned, as I said earlier, that credit growth could pose a problem in the future if it funds activities that are not bringing enough of an economic benefit to the country.

As far as Japan is concerned, the Japanese government is setting out on a broad programme in order to overcome its deflation and restart growth. That’s a process that they call “Abenomics”. It’s a process that we think is an important one; after twenty some odd years of deflation and low growth, it’s an important one. It is true that the early success that they’ve had in the monetary policy easing of that programme has created some unease in other countries in Asia, in Europe, out of fear that the liquidity creation in Japan would lead to growth in liquidity elsewhere. We don’t see evidence yet that Japanese policy has led to significant spillovers or capital outflows from Japan, but we are aware of and would be watching -- we are aware of the unease that countries have expressed. We recognize that the Japanese exchange rate has moved significantly since the policy began, and that does have an impact on some countries, especially countries that compete with Japan as suppliers and find their relative competitiveness changed. We don’t think that that’s an issue for China. Certainly we’ve heard here in China some concern about the Japanese policy, but it’s more prospective, the question of what impact this is likely to have. When we look at it, we’re not seeing yet significant impacts on the Chinese economy.

QUESTIONER: Can I have a question on the long-term GDP growth? So, China is quite determined to rebalance its economy with a course of lower GDP growth, but there are also discussions what the number should be. And as Premier Li Keqiang stated yesterday, that China has to keep 7 per cent growth in five to fifteen years in order to get the growth target. So, what is your opinion on this, your predictions in GDP growth in five to ten years? And is there a basic growth figure that it has to be? And what will happen if the growth is below 7 per cent? Thank you.

MR. LIPTON: I think there’s no question that in the medium term the economic growth in China will be lower than the very high peak rates of growth that China has seen at various years over the past decade; and that is largely because the investment phase of growth is bound to wind down, and the ability to absorb people from subsistence farming into the economy is bound to come to an end or approach an end. Now, what the growth rate will be in the future is very uncertain. Our view is that a healthy form of growth for China would include rebalancing of growth from an orientation towards exports to an orientation towards domestic demand, building household incomes, building household consumption. We have no doubt that China can continue to grow at a quite healthy pace. That growth will be based on greater skills in your labour force, greater investment to support balanced growth, and continued technological progress and innovation, but exactly what number of growth will be - is uncertain. I would just say that it seems to us important to promote that rebalancing and promote rapid growth; but in trying to achieve growth, to be careful not to pursue forms of growth that at the end of the day will be unsustainable or unhelpful. In other words, it would be in our view unwise to continue to promote growth through an investment approach that’s geared towards building the export sector because we feel that is a growth model that has run its course; and going down that road is likely to lead more to inefficiency and waste rather than sustainable growth.

QUESTIONER: I have two questions. The first is - how do you view Premier Li Keqiang’s urbanisation strategy, because in the past decade massive investment has driven China’s urbanisation, and there are signs that some local governments are still favouring driving up local investment under the name of urbanisation. If you could have any suggestions to Premier Li, what would that be? The second question is - recently the Chinese Yuan has gained a lot even under the backdrop of the Dollar strength. When you met PBOC chief, Zhou Xiaochuan, did he explain to you whether there’s any change to China’s currency policy and if there’s any timetable for China to widen the Yuan band? Thank you.

MR. LIPTON: Thank you. I think in the area of local government activity and urbanisation, I would say two things. Number one, it is very important that local governments have accountability for the decisions that they’re taking because they will have access to large amounts of resources and be undertaking very important expenditures, important for economic development, important for social development; and it’s important that those decisions lead to a very good and useful and efficient dedication of resources. Second, I would say there’s no question that urbanisation has been a successful part of China’s development strategy, and I think it’s very likely that it will continue to be. There are cities that still need to expand, and there are many people who can be drawn into efficient economic activity in urban areas. I think you’re right that there’s a risk of inefficient local government decisions and there’s a risk of inefficient urbanisation decisions. Therefore it’s important that there be good governance and accountability so that urbanisation can continue to take place but can also lead to efficient economic organisation providing jobs for people, good living standards; and with the proposed changes in the residency permit system, can lead to families having access to the social benefits that will allow their children to have health and education.

Second, you did ask about the renminbi. I don’t want to comment on short-run renminbi issues. I think as we’ve said, in the medium-term it’s important that the economy rebalances from an export orientation to an orientation of building domestic demand. Part of that strategy is boosting household incomes, but another part of that strategy will be having a more flexible renminbi, building the strength of the renminbi market, and seeing a stronger renminbi as time goes by so that the moderate undervaluation is overcome. I’ll stop at that. Thank you very much.


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