Transcript of Press Conference on the Conclusion of the 2018 Article IV Consultation with China

May 30, 2018


James DANIEL, Mission Chief for China and Assistant Director of the Asia and Pacific Department, IMF

Alfred SCHIPKE, Senior Resident Representative for China, IMF

Daisy WONG, Press Officer, Communications Department, IMF


MS. WONG: Welcome to today’s press conference of the IMF 2018 Article IV Consultation with China. Together with me today is Mr. James Daniel. He's Assistant Director of the Asia-Pacific Department, and also the Mission Chief for China.

MR. DANIEL: Good afternoon.

MS. WONG: And also joining us is Mr. Alfred Schipke. He's the Senior Resident Representative for China at the IMF. Just before Mr. Daniel will give us some short opening remarks, I want to quickly remind you that today's Press Conference is on the IMF Article IV Consultation on China, and we hope that you will focus your questions on the Chinese economy. Okay, Mr. Daniel, please?

MR. DANIEL: Thank you, Daisy. And thank you to all of you who are attending, and your interest in our work. Let me just make a few introductory remarks. You have the press release, but maybe I can say a few words first.

Our main message is, the Chinese economy is performing well, and reforms are making good progress. Over the last couple of weeks, discussions have focused on the authorities' development and reform agenda to achieve their goal of high quality growth and the importance of accelerating reforms in key areas.

In 2017, economic growth accelerated for the first time since 2010, and this was driven by a cyclical rebound in global trade. The strength of the Chinese economy is expected to weaken only slightly in 2018.

Reforms progressed in several key areas, financial sector de-risking accelerated with a wide range of decisive measures adopted, credit growth slowed, over capacity reduction progressed, anti-pollution efforts intensified, and opening up continued.

We welcome the authorities' strategy to more decisively shift the policy focus from high-speed to high-quality growth. In particular, shifting from excessive debt-financed investment towards consumption; and that will sustain growth with rising living standards, a cleaner environment, and much reduced risks.

We very much support this policy focus, and we encourage the authorities to persevere. Achieving this goal of high quality growth requires building on the authorities' existing reform agenda, and taking advantage of the current growth and reform momentum.

As our Managing Director recently said, it's about fixing the roof while the sun is shining. And in particular, this requires the following, in our view.

First, following through on stated intensions to de-emphasize growth targets; second, continuing to rein in credit growth; third, further boosting consumption; fourth, allowing market forces a more decisive role; fifth, accelerating opening up to the rest of the world; and lastly, modernizing policy frameworks. And I can elaborate on these if you wish.

Given China's record of successful reforms in the past decades, and the authorities' strong commitment and determination, we are confident that China will rebalance to a sustainable growth model.

Thank you. And I look forward to your questions.

MS. WONG: Thank you, Mr. Daniel. Before we take your questions I would like to remind you that this press conference is on the China Article IV Consultation, so I hope you can focus your questions on the Chinese economy. And please identify your name and organization when you ask questions. Thank you.

QUESTIONER: It's a question about trade conflict with the U.S. and to what extent is this a risk for the Chinese economy?

MR. Schipke: We are looking at the rise in protectionism as a downside risk. And the IMF is arguing for collaborative work to address and reduce trade tensions. In our view, unilateral actions can be counterproductive, so, again, we are calling for cooperation and reduction in trade tensions. But as you point out, that is, and the IMF has repeatedly said that in the past, is a downside risk.

MS. WONG: Thank you. Next question, please?

QUESTIONER: I have two questions. The first one, how do you evaluate the impact of the monetary policy right now? because increasing rates had a big impact on Argentina and Turkey right now. So, I want to hear your evaluation about it. And the second one, how do you evaluate China's monetary policy? Thank you.

MR. DANIEL: Thank you for that question. Indeed, we see for emerging markets, in general, that conditions have tightened somewhat since mid-April, and that reflects, as you are pointing out, somewhat higher interest rates in the U.S., and a stronger dollar.

Overall, we think the effect on emerging markets has been quite contained. Now, obviously some emerging markets, like you mentioned, with specific idiosyncratic risks are being more vulnerable. There is of course also the risk that there could be a more broad-based increase in the emerging market pressure, should there be a sudden bout of risk aversion, or a faster than expected tightening in financial conditions in advanced economies, as we've been pointing out in our publications and our communications in recent months.

Now, bringing it back to China, we think China is actually well placed to deal with these pressures. It has, as we've recently said, quite balanced capital flows, it has still very large reserves, it has a strong external position. The capital account is still very controlled, and the authorities as we know from first hand, speaking to them, are well aware of the situation and have many tools at their disposal.

Though I would like to underscore some of the messages that we have in the press release, that it's important for China just to continue with its reforms to make itself less vulnerable, and that's for example why we keep advocating to continue to increase the flexibility of the exchange rates, so that can act as a shock absorber.

QUESTIONER: I have two questions. The first one is, China recently announced a number of measures to further open up its financial markets, and some industrial sectors. I would just want to know your comment on this move. And the second one is, how do you look at China's deleveraging efforts in the last few years? Thank you.

MR. DANIEL: Thank you for the question. Let's take the big-picture perspective here. It's 40 years since China has started its reform in opening up, and great things have been achieved. China has gone from one of the poorest countries in the world to a middle-income country, and upper-middle-income country, and the second-largest economy in the world.

It has brought million, hundreds of millions of people out of poverty, and a lot of this is due to the reform process and opening up in particular. It's clearly a win-win, and China should not stop here for its own interest.

Opening up is integral to the government's own agenda of achieving higher quality growth, it's also important for the world. China now is the largest exporter in the world, and what China does matters globally, and it's important as we say in the press release, for China to continue this progress.

And as you pointed out, I think we've seen even just the last couple of weeks, more progress, the opening of the financial services, as you mentioned, and we have been discussing with the government in the last couple of weeks, it's clearly their intention to continue. And we very much welcome this intention, and we'll just encourage it to accelerate.

In terms of deleverage efforts, I guess there are two perspectives here, there's the financial sector deleveraging, and then there's the deleveraging of the real economy.

Let me talk about the first, the financial sector deleveraging. Here, I think it's been quite impressive; the determination of the authorities to address what was a quite rapid buildup in risk in the financial sector in recent years.

We've seen wide-ranging, continued, coordinated efforts to contain the increase in risk in the financial sector, and that's very encouraging.

This has led to some financial sector deleveraging, which is very welcome. The interconnectedness of the system is now being reduced. Some of –the more risky products are declining, some of the exposures between banks and other financial institutions are being reduced.

So, financial sector leveraging is making very good progress, there's still more that needs to be done, but we are very reassured, and we are speaking with the authorities over the last couple of weeks, it is clear the determination is no way diminished.

The picture is bit more nuanced when it comes to deleveraging of the real economy because there hasn’t actually been any deleveraging. Let's be clear about that.

What has happened is that the rate of increase of debt has slowed quite significantly, and that's good. You know, if you want to -- if you go on a diet and you want to lose weight, you don't want to go on a crash diet; you want to do it a bit gradually, and in a sustainable, healthy way. And what we would say is, continue this progress, stay on this healthy diet.

What do we mean by that? What we mean is, continue with reforms that will allow you to grow without being so reliant on credit. So, you make your growth less credit-dependent. And that's what we are talking about. We are talking about moving in a way from investment-led growth, which is highly dependent on credit, to a more consumption-led growth. That's where we are coming from.

And here we see good progress, we see a need for further progress, for example, in reducing investment by local governments, tightening budget constraints on state-owned enterprises, and continuing to curb the quite rapid growth in some areas of household credit.

QUESTIONER: What’s your advice on China’s further opening up of the financial sector (Speaking in Chinese).

MR. SCHIPKE: Maybe if we could just add one more thing. We are very much supporting of further opening up of the financial sector, but we are also highlighting that it should be done in a gradual way, because financial sector opening up and liberalization ought to go hand in hand with accompanying reforms.

What do we mean by that? It means that the financial sector needs to further strengthen. And as was mentioned earlier from our point of view, it is also important to have the exchange rate become more flexible. So we see this opening up in tandem with many other reforms. I think from our point of view that's very important.

QUESTIONER: to Mr. Daniel, and you talked about the local investment just now, so I wondered, do you think there's a contradiction between the local investment and the progress of the China's urbanization?

MR. DANIEL: I think China needs to and will continue to urbanize, and there is a continued need to for public investment to make sure that happens in a healthy and sustainable way.

We are not saying that public investment should be cut dramatically, but at the margin, as we are saying, we think that the fiscal accounts could move towards more supporting consumption, and less of investment.

Why is that? Well, if you invest an awful lot, like China does, the returns to that investment tend to go down, and when you have high debt levels, you need to be particularly careful. And China, as a country, and the households in China actually consume relative little of their income. They save an awful lot.

So, if instead you can switch the engines of growth from being driven by investment to being driven by consumption, you would not only get people's living standards up, you would also have a cleaner environment, and you would also reduce the financial sector risk.

How do we -- what does that mean in practice? We would suggest that there are many actions that can be taken, from the government point of view they could spend more on health, they could spend more on education, more on social transfers. And it is already happening, no question these are being expanded, but we think it could be expanded maybe a bit faster.

And then you ask, where does the money come from? We suggest that you could finance this through progressive ways that get revenue from those sectors of the population that save quite a lot, and that would also be good for income inequality. And by that I'm talking about increasing the taxation on property, on incomes, and especially on pollution, which I think would be beneficial.

QUESTIONER: I was hoping you could comment on the recent uptick in defaults, and specifically corporate bond defaults, but also default in the shadow banking market. So, one, could the rise in defaults create financial risks of their own? And two, what are you guys observing in terms of how local government are dealing with these defaults, including defaults by private firms? What kind of pressures are they under, given that some of the local governments are also dealing with their sort of fiscal weaknesses?

MR. DANIEL: We think it is only natural and healthy for there to be more defaults from China. China stands out for having remarkably low number of defaults, despite being a really dynamic economy with very large financial markets, there is really relatively few defaults.

Why does this matter? It's not like we like defaults, per se, of course, but what we suggest is that when you save a lot of money you want to invest it productively, which means that if you invest it, you have to link the returns to the riskiness.

If all investments are equally risky, then you don't do any differentiation, you don't get selection of the good projects and the bad projects. Investors aren't so aware of the risks, so defaults and higher spreads are the best way to incentivize the market to allocate China's precious savings more efficiently.

Now, of course, there's a risk that you go from very few defaults to quite a lot, and for a market and for investors that are not used to that, that could prove to be destabilizing.

We do not see this. We see some uptick, but it's very much contained and appropriate. I'd also say from our meetings in the last few weeks, and the regulators are very well aware of these risks, and they have the tools to address them if they materialize.

MS. WONG: Thank you very much. I think we have a question at the back, the gentleman, please?

QUESTIONER: Thank you very much. You were mentioning, China obviously now has moved up the value chain as a middle-income country by now, and also faces a rapidly-aging population, rising labor costs. What do you think is the biggest threat now that could possibly derail the Chinese economy? Have we come to the point where China could possibly step into the middle-income trap, or has China already passed that station? And also how do the officials that you’ve been talking to, like Liu He, look at those issues? Thank you.

MR. SCHIPKE: Maybe I think it's also helpful to, just not look at China as one homogeneous place. I think what we are looking at is a China that has, on the one hand, still parts that are more consistent with developing economies, and then you have other parts of the country that are already extremely advanced, and potentially even at the frontier.

So, I think it is a little more complicated than just looking at averages. I think that's the first. The second one, from our point of view, and that's one of the points that we are highlighting in all of our discussions, and I think where there is agreement.

As China now continues to liberalize allow markets to play a larger role, which is also our advice, allow the economy to open up further, that needs to go hand in hand with the strengthening of what we call policy frameworks, which is the regulatory part, the rules, the enforcement of the rules.

Many of the countries that have challenges and associated maybe with the middle-income trap, that's one of the issues that the institutions usually have not kept up with the rate of economic development. So I think, again, here the key is to focus on strengthening the framework.

The authorities I think in the financial sector have taken important steps, probably more needs to be done, and the key here is to just stay the course. So institutional development, policy frameworks is very important, especially if and when you open up and you liberalize.

QUESTIONER: Thank you. I have a question for Mr. Daniel. It's a question about your personal experience, because we know that at least for three years you have led the mission with China, and for these years you have visited some cities, like Beijing and Shanghai, and Shenzhen. And you also visit some developing residents in China, like the Neimeng (Inner Mongolia) and then Lanzhou.

So, my question is, what kind of changes have you witnessed during these three years? And what different things do you see, and observed from your visits in the different regions of China? Thank you.

MR. DANIEL: That's a very nice question. And thank you for being so observant. And I've certainly learnt an awful lot in my three years in China and I look forward to learning much more.

I would just reflect what my colleague Alfred said. It's that as you understand China more, you understand also the divergences within the economy, the simultaneous issues that you associate more with emerging markets, with advanced markets, and it's difficult to apply existing frameworks.

For me, personally, I started working on China having come from Europe. I was Mission Chief for Italy and Spain and Portugal, and then I switched to China. And that was a big change, because first of all the decimal place moves. You know, in Southern Europe growth going by 0.1, 0.2, it makes a big difference. In China, you know, it's 6-point-something, and you have to get used to new magnitudes.

It's a much more dynamic economy, much more interesting, much more challenging issues in many ways, and many more reforms going on simultaneously.

So, I've been impressed by the number and complexity of reforms that are going on, and the divergence within the country, and the challenges for policymakers. I really felt that.

One change I would say is that when I first started working on this country, financial sector risks, I thought, were quite significant and increasing quite fast.

And I think if you’ve seen our reports from 2016, 2017, if you look at our Financial Sector Assessment Program Report from last year, I think we were quite clear that there were significant risks in the system, and that they were increasing at a rate that was not comfortable.

And this year, I really have noticed a remarkable determination and implementation of reforms. And working at the IMF for a long time, you often call for decisive, wide-ranging reforms, and when you come to a country that actually does it, it's encouraging. So, on a personal level, I would say that's, you know, the reflection that I have.

QUESTIONER: Thanks, James, for your speech. I have two questions; one is on the long-term projection of growth, of 5.5 percent by 2023. I was wondering how this forecast align with previous IMF projections? Or, if perhaps you have not made such long-term projections in the past, in how it might compare with the government projections as well? Was that a surprise, or was that more or less, what you’ve been expecting for the last few years?

Secondly, on the shift from unstable debt growth -- investments, sorry, to consumption-led growth: how do you see the growth of debt in consumption? For example, micro lending or consumer lending in fintech, do you see that there's quite room to go for absorption of consumer debts, and in a relatively low consumer debt society? Or do you see that also as a potential risk? Thank you.

MR. DANIEL: Nice questions. The 5.5 medium-term growth projection is more or less -- I'm sorry to be dull -- but it's more or less what we were projecting before. Whether it's in line with the government's projections, I think they formerly do a projection that far out.

My understanding is that most officials would expect growth to moderate gradually over time. Our point here is that China has the potential to keep growing, as I was saying before, relatively high rates for a substantial time. China's GDP per capita is only 15 percent of the U.S.'s in dollar terms, there's a lot of potential to keep growing.

What we focus on is avoiding the bumps. You know, the middle-income trap that I think one of your other colleagues pointed out, these middle-income traps come about because of abrupt slowdowns, and we need to avoid bumps along this, and we need to avoid bumps along this road.

If you want to get to a destination in your car, maybe fast is not always the best way to get there safely. Maybe a little slower, you'll be more sure of getting there. And that's why we want to -- that's why we are making these reform recommendations.

Not because we like slower growth, it's that we want to have, you know, output to be as high as possible, in a sustainable way over the medium term.

On household debt, we have noticed, as I think you have, and everybody else, that it's been growing quite rapidly. Now it starts from a low base, let's be clear. Household balance sheets are also pretty strong. Our point is that high rate of growth isn't sustainable over the longer term, and it should be addressed.

Let me though take the opening that you’ve given on FinTech. And I was just reflecting on my previous answer, and I forgot to say anything about FinTech.

Obviously, coming to China is one of the most -- is one of the things that you notice the most, is the rapid development of e-commerce and FinTech in general. And here we've been having quite a few discussions with the Chinese authorities as well.

Obviously, when you come to China you notice just how useful and socially beneficial this has been. It has given all of you in the room, probably, a hugely improved experience. It's also talking about the disparities in China, allowed many of the poorer people, and smaller enterprises to have access to financial services for the first time, which is just super, and wonderful, and has many, many benefits.

One shouldn’t also be blind to the potential risks of FinTech. Just because you're a FinTech company doesn’t mean to say you can be doing financial services without regulation, there should be regulatory arbitrage. Regulators will need to keep a close eye on this to make sure that risky financial activities are appropriately regulated wherever they may occur.

There's also careful need to avoid things like criminality associated with FinTech, and to make sure the customers are known. So, there are risks. But talking to the regulators here, it's clear that they are very much aware of these risks.

And actually, the world looks at China, China in many ways is more advanced on these issues, and the regulators are at the forefront, so we've been also learning from the regulators as we've been speaking to them over the last couple of weeks.

MS. WONG: Okay. Thanks very much.

QUESTIONER: Thank you. I have a question on trade. How do you think the trade, U.S.-China trade frictions will affect China's economic growth in this year or probably in the following years? As you mentioned, last year, China's economic growth accelerated for the first time in many years. So, how will that affect the growth here?

MR. SCHIPKE: Maybe just to reiterate what I thought I said earlier. You know, from our point of view we think it is important that both sides try to collaborate to de-escalate, and to avoid any kind of tensions.

We all know, and our Managing Director has said that on several occasions, that these trade tensions are not beneficial for anybody.

There are two different dimensions how trade can impact an economy. One of course are the direct impacts that, for instance a tariff could have on the economy. And maybe those are not even the most important ones. I think there are many dimensions to that, and they are very difficult to estimate, for instance.

It's the uncertainty, what does the uncertainty do, when it comes to confidence, consumption, investment confidence, financial markets, and so there is always the risk that the ultimate implication of that can be a lot of higher.

But, again, coming back to the statement, you know, we are encouraging that people use the multilateral approach to resolve issues in a global system, and there are challenges, but the multilateral system were set up to overcome them.

I think people are arguing that maybe it's not perfect, so one ought to think about how to move forward, and reform to find, what we would call better globalization. And to deal with some of the grievances that individual countries might have.

MS. WONG: Thank you, Alfred. I think we have time for the last question.

QUESTIONER: In your press release, at the end of the press release I notice that you embraced the OBOR Initiative. I wonder if this stand is in contradiction with your policy recommendation that China should switch from investment-driven model to a consumption-driven model. Thank you.

MR. SCHIPKE: On the One Belt, One Road, in our view the Belt and Road Initiative has a lot of potential, but it has many elements to it. I think a lot of people are just thinking about physical investment, but it's about connectivity. It is, at the end of the day, also about reducing trade barriers. So, I think it's the collective view on all of these issues that we believe could be very beneficial.

You know, we also however point out that it's very important to take into account, if there's investment, you know, what type of investment, to make sure that these are sound investments, that the decision-making processes are good, that the frameworks are good to minimize the risks of any difficulties down the road.

So, a lot of potential, but in any decision that is being made, you have to be careful that the resources that are being deployed are used efficiently, and give you the maximum return.

MS. WONG: All right. Thank you very much. I think we would like to conclude the press conference here today. Thanks to all of you for coming.

MR. DANIEL: Yes, thank you very much.

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