Transcript of a Press Teleconference Call with International Monetary Fund Officials on China's 2009 Article IV Consultation
IMF News, July 24, 2009
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- Published: July 24, 2009
Background and scope of the 2009 Article IV Consultation
- Mission timing and locations visited:
- Mission went to China in late May, early June.
- Visits included Anhui Province (Hefei), Shanghai, and Beijing.
- Principal focus:
- The main focus was on policies needed to catalyze private consumption and to reorient investments in China amid the global financial crisis.
- Dialogue with authorities, financial institutions, and private sector participants was described as constructive and candid.
- Institutional framing:
- The consultation assessed both domestic policy needs and international spillovers, consistent with the Fund’s bilateral and multilateral surveillance mandate.
Exchange rate assessment and labeling
- Operational guidance and labels:
- The original operational guidance from the 2007 surveillance decision included exchange rate labels (e.g., “fundamental misalignment”).
- That guidance was revised in June because the use of labels was judged to impede effective implementation and candid surveillance assessments.
- As a result, labels were not used in the China consultation.
- Staff and Board views on valuation:
- The staff report assessed the exchange rate as “substantially undervalued.”
- Board discussion showed differences of view: some directors described the exchange rate as substantially undervalued; others saw a lesser role for the exchange rate in rebalancing.
- Role of exchange rate in rebalancing:
- A stronger RMB was judged to help by:
- Reducing the price of tradable goods and increasing labor income (boosting consumption).
- Providing incentives for greater investment in domestically-oriented sectors.
- The exchange rate was one important policy among many; reliance on any single policy would be insufficient.
Quantitative note on past exchange rate movement
- Since 2005, the mission noted “around a 20 percent increase in the real exchange rate” in effective terms.
Monetary policy, interest rates, and cost of capital
- Structural cost of capital:
- Staff saw a need for a structural increase in the cost of capital because capital was judged to be cheap, incentivizing highly capital-intensive investment, particularly in tradable sectors.
- Recommended gradual phasing out of the ceiling on deposit rates to raise the cost of capital.
- Current monetary stance (as of the consultation):
- The loosening of monetary policy since late last year and through this year was judged appropriate and well calibrated to circumstances.
- Risks from monetary expansion were recognized, notably related to credit quality given a very large increase in credit growth.
- Policy sequencing:
- Once the economic recovery is more firmly established, the staff favored withdrawing monetary stimulus prior to fiscal stimulus.
- There was perceived scope for “perhaps even a little bit more fiscal policy stimulus this year, the remainder of this year and next,” while monetary stimulus is steadily withdrawn.
- Deposit-rate liberalization:
- Authorities have moved toward market determination of rates in the interbank and corporate bond markets.
- Remaining issue: liberalizing deposit and lending rate ceilings, with attention to timing and preconditions (strong supervisory framework, alternative monetary-policy tools) to mitigate financial-stability risks.
Fiscal stimulus and rebalancing toward consumption
- Existing stimulus:
- A substantial stimulus package announced in the fall of last year was framed across two and a half years through the end of 2010.
- A large part of the stimulus has come through infrastructure spending; expanded health care spending and some pension expansion are also in the pipeline.
- Staff recommendations on fiscal stance:
- There was “probably some scope for maintaining that stimulus next year in terms of maintaining a fiscal deficit of about the same order this year as next year.”
- Preference to reorient some fiscal stimulus away from infrastructure and toward measures that directly boost private consumption (consumption subsidies, reductions in some consumption taxes).
- Any additional stimulus envisioned was marginal relative to last year’s package, possibly coming from an additional deficit or reorientation within existing plans.
Labor markets, reallocation, and regional dynamics
- Labor-market absorption:
- Official data and anecdotal evidence suggested labor markets have been “absorbing workers laid off from export industries,” with reallocation occurring geographically and across sectors.
- Observed dynamics:
- Some migrant labor returned to export sectors with possible reductions in real wages.
- Interior provinces and rural areas have been experiencing stronger growth relative to historical patterns, absorbing labor.
- Fiscal stimulus (infrastructure spending) has absorbed labor in inland areas.
- Caveats:
- Data coverage issues (especially for migrant workers) complicate precise measurement; assessment uses a mix of official statistics and mission field observations.
- Outstanding concerns remain for specific groups (e.g., college graduates).
Spillovers and multilateral context
- Near-term spillovers:
- Because current growth was driven largely by public spending with relatively low import content, near-term regional spillovers were assessed as more limited, except to commodity producers (e.g., Australia) where infrastructure is commodity-intensive.
- Long-run spillovers and global rebalancing:
- The policies advocated (boosting private consumption, social sector improvements, increasing cost of capital, capital-market development, exchange-rate adjustment) were judged to reduce global current account imbalances and have positive global effects.
- The Fund positioned these policies as consistent with China’s domestic interest and beneficial for the global economy.
Data quality and the Fund’s information use
- Data scrutiny:
- The Fund does not collect primary statistics but triangulates China’s official data with other available data (regional comparators, Hong Kong; Taiwan Province of China; Japan).
- Fund staff judged China’s official statistics broadly consistent with other information, acknowledging some statistical issues but not ones that materially changed the overall view.
- Technical assistance:
- The IMF provides considerable technical assistance to China on statistical issues.
Article IV timing, publication, and related procedural issues
- Delays in consultations:
- The Article IV consultation had been delayed in prior years; reasons included implementation issues related to the 2007 surveillance decision on exchange-rate labeling and disruptions from the global financial crisis (e.g., September problems with Lehman Brothers).
- The Board meeting was not blocked or vetoed by Chinese authorities; the delays were related to internal discussions on guidance and other intervening factors.
- Other members’ consultations were also delayed for similar reasons.
- Publication of staff report:
- A staff report was presented to the Executive Board.
- Publication of the staff report is subject to the decision of the Chinese authorities, who were considering whether to publish; there was no specified timeframe for that decision.
Transcript of a Press Teleconference Call with International Monetary Fund Officials on China's 2009 Article IV Consultation, July 24, 2009.