Press Conference on China Article IV

August 17, 2017


James Daniel, Mission Chief for China, and Assistant Director, Asia and Pacific Department
Markus Rodlauer, Deputy Director, Asia and Pacific Department
Ting Yan, Communications Officer, Communications Department

MS. YAN:  Good morning, everyone and good evening to those who are calling from China.  My name is Ting Yan.  I’m with the IMF Communications Department.  Thank you very much for joining us today for this conference call on China’s 2017 Article IV consultation.  You may have seen all the documents.  They’re available on the IMF press center, including staff report, press release and other related materials. Let me remind you that these documents, together with this call, will be embargoed until 9:00 a.m. today, Washington, D.C. time, 1:00 p.m. GMT and 9:00 p.m. Beijing time.

On this call today, we have Mr. James Daniel, mission chief for China and assistant director of the Asia and Pacific Department of the IMF and also Mr. Markus Rodlauer, deputy director of the Asia and Pacific Department.  We will first have James talk briefly on the key conclusions of the Article IV consultation and then we will take your questions after that.  James?

MR. DANIEL:  Thank you. Hi everybody. Thank you for your interest in this report. Let me just summarize the main messages in this report. So perhaps the main message is that the IMF has increased China’s growth projections but we have also increased the debt projections and that’s the medium-term risk, which needs to be addressed so that growth can be safely, and I underscore safely, sustained at a strong level.

Addressing these risks requires reforms to rebalance the economy towards less credit intensive growth. Now we recognize that reforms are already underway across a wide range, in particular, overcapacity is being reduced and borrowing by local governments is being made more transparent.  More recently, regulators have started addressing financial sector risks.  Now, our advice in general is that these are reforms that need to accelerate, and now, while growth is strong, is the time to do so. 

Specifically, we have five broad recommendations.  The first one is boosting consumption by increasing social spending by the government and making the tax system more progressive.  The second is increasing the role of market forces by reducing implicit subsidies to state owned enterprises and opening up more to the private and foreign sectors.  Third, deleveraging by the private sector by continuing the recent regulatory tightening in the financial sector and greater recognition of bad assets in the financial sector. Fourth, ensuring macroeconomic sustainability by focusing more on the quality of growth and less on quantitative targets.  And fifth, improving policy frameworks so that the modern Chinese economy can be better managed and this speaks to a wide range of frameworks including the relationship between the central government and local governments, the framework for financial stability, the framework of monetary policy and data.

So those are our main points from the report and we will be very happy to take your questions and explain anything further on them if you wish, thank you.

QUESTIONER: First of all, and I’m just wondering if you can comment on the efforts by the Trump administration to take the first steps towards launching an investigation of intellectual property theft in China, basically focusing on the requirements that joint venture partners turn over technology to their Chinese partners.  I’m just wondering if you see this as a particular problem in China and you know, is this the right approach to solving it?

MS. YAN:  Thank you.  Markus will take your question.

MR. RODLAUER:  This is coming at a sensitive time, difficult time.  Let me say the following on this.  We at the fund, we believe strongly it will be premature for us to comment on what policy steps eventually might come out of this process.  But we would also want to say more broadly that the fund strongly supports an open trading and investment system, knowing that these systems have brought great gains to the global economy and to all countries participating. 

We would also reiterate the importance of working within the multilateral framework to resolve differences and we believe that the multilateral trading system can be an important source of economic prosperity for all countries concerned.  Thank you.

QUESTIONER: Hi. I just want to follow up.  I mean the report you said the investment environment has improved.  I mean could it be, I mean obviously, SOEs market entry has, you know, made it very (inaudible) removed somewhat.  So could you elaborate a little bit what you mean by that?  The IMF has madeconstant alarm about the China debt problem that I could, 260 percent of the GDP.  So could you address that, whether the Chinese government, they have realized this, are they taking action to try to address the problem, or do you think the problem is getting worse than it is.

MS. YAN:  Thank you, I think James will answer your question.

MR. DANIEL:  Thank you, let me just make a couple of of responses here, and start with the last question on what could perhaps bethe largest macroeconomic risk facing China and that is the debt issue.  When we discussed this with the Chinese authorities, there was a clear, common understanding about the importance of addressing this risk, so to come back to your first question, they realize absolutely.  I think you can see from thepublic communications by the Chinese authorities and their actions, that deleveraging is one of the top policy priorities for them. And yes, they are taking action.

We know many of them, a wide range of measures that state-owned enterprises and other firms can take to reduce their debt, the reduction in  overcapacity and most strikingly, over the last six months or so, action taken by regulators to tighten debt within the financial sector.  Now in terms of is the problem getting worse, I would say that it is getting worse because debt is still growing and is projected to grow. But perhaps the pace at which it’s getting worse is moderating.  And our point is that,  this is encouraging and now is the time to continue and accelerate these efforts to make debt  more sustainable as soon as possible but I think we need additional actions that we speak about.

In terms of opening up to the private sector we list a few issues that have been done in the report, but I think our underlying message is that there is still much more that can and should be done. We highlight that for state owned enterprises, much more can be done to accelerate their reform by moving social functions away from them, and by opening their protected sectors to more private and foreign competition.  And we think this would be good for China and for its trading partners. Not only will it increase productivity by making state owned enterprises more efficient, it will also bring in expertise from the private sectors and the foreign sectors.  So while we do see some progress in we still think there’s much that can and should be done.

MS. YAN:  Thank you, James.  Markus has some follow-ups.

MR. RODLAUER:  Yes, let me just maybe say two points on the issue whether the government has recognized this problem and is acting on it.  I think the first point is obviously the leadership at the most senior level and those that central bank and  whole body politic I think clearly has decided that this is a matter of major national concern that needs to be dealt with.  You see that in many statements including the president declaring that financial issues and stability are a matter of national security.  I think that’s highly significant and it works well.  And we see the recent actions have started to implement that new focus.

Now the second point is ahead of us. It needs to be  sustained.  And it needs to be sustained in two ways, one; surely problems that are going to emerge in the future in implementing this. Financial tensions are bound to rise, in fact, they are supposed to rise because you want to eliminate blanket state guarantees, you want to have bankruptcies, you want to have financial firms that have been unreasonable in their lending getting into trouble.  And so if that happens, and also the resulting growth slowdown, the ship needs to carry on course.       

And therefore, second, also, these are growth subtracting reforms clearly.  You want to reduce too high investment, too rapid credit growth.  That will subtract from growth.  In order to make that sustainable you need to open up new sources of growth.  Opening up the private sector.

So again, a good start has been made, but to safely sustain this going forward you need to keep at it by being tough against the headwinds that come up.  But you also need to support growth so the new sources, which means opening up to the private sector.

QUESTIONER: So regarding the timing, James mentioned you need to kind of ‑‑ given that growth is not really good, we need to start the reforms now.  Most of (inaudible) we should also continue on the acceleration of the tightening of financial reparations.  But given this 19th Party Congress coming up later, do you think it is likely that these measures will come at the current moment?  And what is the prospect of delaying it (inaudible)?

And related to that, I think James mentioned government should increase social spending more aggressively for specific (inaudible) at the moment and (inaudible).  Is there any way (inaudible)?  Thank you.

MR. RODLAUER:  So maybe I’ll take the first more broadly political question that you raised, a policy question, and then James can follow up with the specific points.

So let me say that, you know, the IMF is in the business of economic analysis and forecasting and we’re not that good at political analysis and it’s not our mandate either, so I would refrain from making a specific prediction of what will happen in the Party Congress and so on.

Let me just say this, that China has surprised us again, I think, in the past year, both in the way they have been able to grow, the way they have been able to contain the emerging balance of payments problems and pressures, and, frankly, also, as I said, in the very top-down senior resolve that they have come out with on these financial sector reforms.

And also the way China has handled its problems in the past three decades I think it’s reasonable to say that we should be cautiously optimistic that China will, one way or another, through the Party Congress and afterwards, find its way to address these challenges before it.  I don’t think it will be linear or done exactly the way we are recommending in the staff report.  I think China will surprise us again here and there, but I’m optimistic that it will in the end be a way forward through those challenges.

But I also have to say we need to be cautious, as I said, because the headwinds are going to be quite formidable, also out of concerns that sometimes one might not expect.  So the problem also is increasing in complexity technically.  It’s no small thing how to resolve a major moral hazard, how to lift the state guarantees from the whole economy.  These are highly complex issues in a financial system that is very modern and complex and intertwined.

So I think a good degree of caution and being ready for surprises, I think, is in order.  But overall, we are optimistic that China will be able to do it.

And I’ll hand it over to James now.

MR. DANIEL:  Thank you.  Let me just come back on the risk of delay.  What is the cost of delay?  And here let me refer you perhaps to the second package you have, what we call the “Selected Issue.”  These are a bunch of short notes that we produced that go with the main report.  And there’s one short note called “Credit Boom: Is China Different?”

Now, the first bullet summarizing this paper says the following.  It says, “International experience would suggest that China’s credit growth is on a dangerous trajectory with increasing risks of disruptive adjustment and/or a marked growth slowdown.”  And our point is this, that the sooner this trajectory improves, the lower the risk.  Likewise, the longer it takes, the higher the risk.  So that is the cost of delay.

Now, in terms of specific measures I think we lay out what we feel is the main message in paragraph 17 of the main report.  And here I point you to the first bullet which talks about the need to increase public spending on health, pensions, and education.  And there’s a graph next to that that shows that spending by China on each one of these items is well below the OECD average.

Now, the second bullet in that paragraph also recommends an increase in social transfers for the poor.  And here the graph shows that the poor in China save much more than the poor in other countries.  And we suggest one of the main reasons for that is that there’s a weakness of social transfers in China.  So those are two specific areas that we would suggest and there’s more in that paragraph.

QUESTIONER:  QUESTIONER: So you mentioned you were kind of surprised by China’s performance this year.  So I’m just wondering from your perspective, what do you think is at play?  Is it export or is it external environment is pretty good or there are other factors?

MR. RODLAUER:  I think there are four key factors.  The first is -- it’s not necessarily in the order of importance.  The external environment, as we said, has been very favorable for China and for other emerging market economies, as you know.  Exports have done very well, but also financial conditions have been very benign globally.

The second, I think we do see now already some effective reforms that have been implemented on the supply side.  I think we see the effect of all the capacity reductions that supported commodity prices and that have fed  back into profits.  I think we also see more of the dynamism in some parts of the Chinese private sector, the high-tech IT and so forth, Internet trade, Internet sales.  You know, they have seen a good market in China, virtually unified through Internet trading and internet trade companies.

Then I think, as I said, also the way how they have managed the balance of payment issues, the exchange rate, the combination of tightened capital controls, some measured exchange rate flexibility that has allowed the exchange rate to come down from a high about a year and a half or two years ago by now.  In August of 2015, the process started with the real effective exchange.  It has been managed down by about 8 or 9 percent.  That has given I think, also, a lift to growth and exports, but also has helped calm the balance of payment pressures, together with the capital controls, and the macro situation.

And fourth, clearly, you know, the stimulus that had been applied from about two years ago to about six to nine months ago, both on government investment, the local government investment measures to revive the real estate sector at that time, these sort of stimulus measures have had a strong impact and have lifted growth.

So the four things together -- external environment, fairly skillful balance of payments and exchange rate management,supply side reforms, and the fiscal stimulus -- these four things combined have produced a fairly strong macro situation now, which has fed back into confidence.  The situation at this point right now, which should be used as an opportunity, as I said and as James said, to bear down and to buckle down and continue with this financial sector adjustment, which is really the Achilles’ heel now of the economy.

MS. YAN:  If we don’t have any more questions we will wrap up.

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