A mission from the International Monetary Fund (IMF), led by Mr. James
Daniel, Assistant Director of the Asia and Pacific Department, visited
Beijing and Lanzhou from June 1 to 14 to conduct discussions on the annual
Article IV review of the Chinese economy. The mission held highly
constructive and candid discussions with senior officials from the
government, the People’s Bank of China, private sector representatives, and
academics to exchange views on economic prospects, reforms progress and
challenges, and policy responses.
The IMF's First Deputy Managing Director, Mr. David Lipton, joined the
final policy discussions and met with Vice Premier Ma Kai, People’s Bank of
China Governor Zhou Xiaochuan, Director of Central Economic and Financial
Reform Leading Group Liu He, Finance Minister Xiao Jie, China Banking
Regulatory Commission Chairman Guo Shuqing and China Securities Regulatory
Commission Chairman Liu Shiyu, among other senior officials.
At the end of the visit, Mr. Lipton issued the following statement:
“China continues to transition to a more sustainable growth path and
reforms have advanced across a wide domain. Our discussions in the past two
weeks focused on the policies needed to ensure China’s successful
transition, which is vital to its own people and the rest of the world -
and the urgency of accelerating pace of reforms.
“Policy support, especially expansionary credit and public investment, has
helped China maintain strong growth. Staff now project growth of 6.7
percent in 2017 and average annual growth of 6.4 percent between 2018-20.
China has the potential to safely sustain strong growth over the medium
term. As has been widely recognized, including in the government’s reform
plans, this requires deep reforms to transition from the current growth
model that relies on credit-fed investment and debt. It is critical to
start now while growth is strong and buffers sufficient to ease the
transition.
“The Chinese authorities are fully aware of the challenges and have taken
crucial and welcome measures. Important supervisory and regulatory action
is being taken against financial sector risks. Corporate debt is growing
more slowly, reflecting restructuring initiatives and overcapacity
reduction. The house price boom is being gradually contained and excess
inventory reduced. Local government borrowing frameworks are being improved
and a blueprint for reforming central-local fiscal relations has been
published. The creation of new businesses has tripled since the 2014
reform. Data weaknesses have been recognized and actions taken to improve
integrity.
“While some near-term risks have receded, reform progress needs to
accelerate to secure medium-term stability and address the risk that the
current trajectory of the economy could eventually lead to a sharp
adjustment. This means switching faster from investment to consumption;
increasing the role of market forces; implementing a more sustainable macro
policies mix, continuing the regulatory tightening; tackling nonfinancial
sector debt; and further improving policy frameworks. Our specific
recommendations build on the progress achieved and the government’s
existing reform agenda. In particular:
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China needs to further boost consumption
. Continued increases in public spending on health, pensions,
education, and transfers to poor households would reduce excessive
precautionary savings and, combined with making the tax system more
progressive and greener, would boost growth while reducing China’s
high income inequality and pollution.
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To increase the role of market forces, the existing reform
agenda for state-owned enterprises (SOE) should be accelerated
and broadened to include phasing out implicit support and
increasing tolerance for default and exit.
Building on recent announcements, barriers to entry should be
removed, especially in the highly closed service sector. Efforts to
reduce overcapacity should have more ambitious targets both in the
coal and steel sectors and in other sectors, with greater reliance
on market forces.
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A more sustainable macro-policy mix would include focusing more
on the quality and sustainability of growth and less on
quantitative targets, a gradual fiscal consolidation, and less
accommodative monetary policy.
To reduce nonfinancial sector debt, the focus should be on greater
recognition of losses, especially of underperforming SOEs and
zombie enterprises. Reducing the flow of new debt and increasing
its efficiency requires cutting off-budget public investment and
imposing hard budget constraints on SOEs.
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The critically important recent focus on tackling financial
sector risks should continue, even if it entails some financial
tensions and slower growth.
We will have more detailed analysis and recommendations on the
financial sector in our five-yearly Financial Sector Assessment
Program (FSAP) review, which we expect to be completed by the end
of the year.
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The monetary policy framework should continue to be
strengthened over the medium term, including by phasing out
monetary targets, resuming progress towards a flexible exchange
rate, and improving communications.
While China’s external position remains moderately stronger
compared to the level consistent with medium-term fundamentals, the
renminbi is assessed as broadly in line with fundamentals. Capital
flow measures should be applied transparently and consistently.
Further capital account liberalization should be carefully
sequenced with the necessary supporting reforms, including an
effective monetary policy framework, sound financial system, and
exchange rate flexibility.
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The government’s guidelines on reforming central-local fiscal
relations are welcome.
We recommend centralizing some expenditure responsibilities, such
as social insurance, while local governments should be given more
revenue-raising authority, as well as sufficient debt quotas to
reduce their incentive to rely on off-budget borrowing and land
sales.
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China also needs to address remaining data gaps to further
improve policy making and meet G20 commitments.
“Given China’s record of successful reforms in the past decades, and the
authorities’ strong commitment and determination, we are confident that
China will once again find its way through the challenges ahead, and we
wish them the best of success in their efforts.
“We would also like to express our sincere appreciation to the Chinese
authorities for their hospitality and productive discussions in the last
two weeks.”