Transcript of the Press Briefing on the Annual Review of the Chinese Economy

July 27, 2018


Mission Chief for China and Assistant Director, Asia And Pacific Department

Deputy Mission Chief for China, Asia And Pacific Department

Communications Officer, Communications Department

MS. YAN: Good afternoon, everyone. Welcome to this press briefing on the annual review of the Chinese economy. The so-called Article IV consultation.

My name is Ting Yan, I'm the press officer at the IMF. Here with me today is Mr. James Daniel, mission chief for China and Assistant Director of Asia and Pacific department at the IMF. And also Ms. Sonali Jain-Chandra Deputy Mission Chief of china team of the Asia and Pacific department.

You may have read the staff reports under embargo so let me remind you all that you know the documents as well as this press briefing are under embargo until 6 p.m. today Washington, D.C. time and 6 a.m. July 27, Beijing time. So James will first highlight some of the key messages and then we will take your questions. James.

MR. DANIEL: Thank you, Ting, and thank you all for your interest. Let me just make a few introductory remarks.

The Chinese economy is performing well and reforms are making good progress. In particular financial sector derisking has advanced further. Credit growth has slowed. Overcapacity reduction has progressed, anti-pollution efforts have intensified and opening up has continued.

We welcome the governments increased focus on switching from high speed to high quality growth, in particular shifting from excessive debt finance investment to consumption will sustain growth together with raising living standards, a cleaner environment and much reduced financial sector risk.

Achieving this goal of high quality growth would be greatly helped by accelerating reforms in many areas. First, deemphasizing the growth target. Rebalancing the Chinese economy will likely mean somewhat overall slower growth. This should not be resisted. For example with a credit fueled investment stimulus.

Second, slowing credit growth. The credit growth has slowed in 2017 but it remains too fast. Slowing it further will require less public investment, tighter constraints on state-owned enterprises and curbing the rapid growth in household debt.

Third, boosting consumption. China's government should increase its social spending for example in health, education and social transfers and should finance it with progressive and green revenue sources like taxes on income, property and carbon emissions.

Fourth, relying more on market forces. This means reducing the dominance of the public sector in many industries, opening up more markets to the private sector and assuring fair competition.

Fifth, accelerate opening up to the rest of the world. China's integration with the global economy over the last 40 years has lifted China from one of the poorest countries in the world to now an upper middle-income country and the world's second largest economy. Yet, China's trade and investment regime remains relatively restrictive. Faster opening up would not only support China's own high-quality growth agenda but also benefit the global economy.

Sixth and last, mobilizing policy frameworks. Financial sector reforms have made strong progress recently. These should be continued. Monetary policy should continue to become more price rather than quantity based and the exchange rate should continue to become more flexible. The central government should share more of local government spending responsibilities, while increasing their ability to raise their own revenues.

Policy making would also be improved by strengthening China's relatively weak macroeconomic data. The Belt and Road Initiative is welcome and potentially transformative. Its success will be enhanced by having an overarching framework more focused on debt sustainability in participating countries and greater transparency. Thank you.

MS. YAN: Thank you, James. Now we can take your questions. Please identify yourself and also push the button to turn on the mic.

QUESTIONER: Two questions. One on the currency and one on reforms in general. Any thoughts on the recent movement in the currency? I mean, I think it has dropped to the lowest in about a year. Are the authorities, you know, is the PBOC proceeding as you believe it should and what do you think are the factors driving it?

MR. DANIEL: Great, thank you. On the currency, a few reflections. The first is you are right. By Chinese standards it has moved relatively quickly against the dollar in recent weeks but not by the standards of other emerging markets and if you look at the RMB on a trade weighted basis the movement has been much less. And in fact, if you look back to where it was, both of these measures where they were at the beginning of the year and indeed the average of last year they are broadly more or less in line.

We have also explained I think in the report that we saw the RMB as fairly valued so that's what I would say on this. Well, maybe one more thing. Also in the report we call on the RMB to become more flexible. So this is in a way what you expect to see. The RMB is becoming more flexible so when you see diversion in monetary conditions in China and the U.S. you would expect movements in the exchange rate. So this is normal and indeed desirable.

QUESTIONER: And just a follow up --

MR. DANIEL: You had a second question.

QUESTIONER: Yes. On kind of the general subject of reforms. I mean, you highlight in your report, I mean, your report really gets kind of at the core of this debate that is happening right now about China’s development right. You know, the U.S. is obviously saying that reforms aren’t happening fast enough, I mean, the Chinese are saying, look, we are working on it. I mean, what is your general assessment of the progress in this area?

MR. DANIEL: Look, I think there is no question China is reforming and making good progress. One of the most remarkable achievements I have seen when we went there just recently is the financial sector. Over the last five years the financial sector has grown very, very rapidly but for the first time we have seen the financial sector actually shrink in relationship to the economy and that shows determined effort by the authorities to get on top of these risks. So I think the idea that there is major reforms underway I think is entirely appropriate.

We have also seen some acceleration recently especially in opening up policies. Nevertheless we think there is much more that needs to be done and we would like to see faster progress in some of the areas that I outlined at the beginning.

QUESTIONER: Thank you. Two questions. First of all, with the trade tensions lingering, by your point of view, is China's economic position strong enough to overcome the current situation? And also would China still be the largest contributor to the global economic growth going ahead? Thank you.

MR. DANIEL: Thank you. China's economy has got very strong fundamentals. I think if you look at the report, you will see a graph on maybe the second page which shows the Chinese economy, you know, getting very, very large over the medium term and maybe even surpassing the U.S. in 2030. There is a lot of catch-up growth still to happen. There is a lot of investment going on. There is undoubtedly a rosy picture to the long term growth fundamentals.

And in terms of the trade, I don’t have specific numbers to share with you on the various scenarios. It is obviously negative if they were to come to pass, no question about that. But they're also manageable. And it is because of these negative implications that we encourage all sides to seek a resolution that supports the global trading system that has served China so well in the last 40 years. And we would also encourage China to accelerate its opening up and to reduce its still excessive current account surplus.

MR. DANIEL: So you had a second one. And, would they still contribute to global? I think just given by the sheer size of the Chinese economy, and the fact that growth has been quite stable and it is still fundamental forces to keep the growth strong we would probably expect that kind of result, yes.

QUESTIONER: My question is to opening up policy. Could you just elaborate more on how does policy benefit China and the world in the past 40 years. And secondly, although the ongoing trade conflict with the United States, China has repeated many times that China support global free trade system. So how important is China's decision to keep this opening up policy to the world? Thank you.

MR. DANIEL: Well, I would come back to what I said at the beginning. I think that imagine where China was 40 years ago- A very poor country. Since then opening up has helped together with China's own efforts become a great success in lifting 800 million people out of poverty. Without the drive and the technology and the opportunities afforded to China by the rest of the world, China would not have grown so fast. And of course the rest of the world would not have benefitted from the goods that China produced so I think there are benefits all around.

How important is it for China to keep on this path? Very much. There is a graph at the beginning that shows China's relative GDP per capita is still only about 15 percent of the U.S. number. Now if China wants to continue to catch up with the advanced countries, it will need to continue to grow faster then and it is going to get increasingly more difficult for China to grow at fast rates. They will have to become much more efficient, increase their technology, increase their competition. And the best way to do that is to open yourself up to the rest of the world to make use of the comparative advantages so I think it's critical for China. But China is also a driver of the world economy so the rest of the world is also looking to China to continue on this opening up.

QUESTIONER: So my question is about the debt issue. Given the recent fiscal and monetary stimulus announced by Chinese government, I wonder how will that influence China's debt problems and do you think China is moving from controlling debts to a stimulus economic growth? Thank you.

MR. DANIEL: I think definitely over the last week or so with the state council on Monday, the recent measures by the PBC and the actions you referred to in terms of tax, there has been some easing measures, there are no question. The difficult question is how big are they? And what does it mean to the overall standard of policy? And here I think it is too soon to say.

Our overall advice is that China needs to continue to reduce its debt levels and to reduce credit growth and on the whole fiscal policy should be somewhat contractionary to reduce debt. Now we have seen very good progress on this actually in the first half of the year. Now if it is a matter of fine tuning around this appropriately declining path, that’s one thing. If it’s a change and going back to old fashioned credit fueled investment stimulus, that would be a mistake. And right now we are reassured by the state councils statement that it wants to avoid such a stimulus so that's where still a bit too early to tell I would say.

QUESTIONER: Thank you. I wanted to just circle back briefly to trade if I may. I know that in your report you mentioned the limited direct impact of trade tariffs on the Chinese economic performance. But I wondered whether I could just probe you for a little bit more on your assessment of what the beyond the direct impact, you know, secondary knock-on effects from the ongoing or, you know, escalation in the trade standoff might be on the current performance and the performance going ahead in the next year?

MS. JAIN-CHANDRA: Regarding the trade tensions, as you mentioned, the direct impact seems to be macro-economically quite limited. However, should there be an escalation, the impact on the macro economy would be more significant. And the second-round effects that we have in mind are increased uncertainty, disruptions in supply chains as well as increased consumer sentiment or rather undermining consumer sentiment. This could weigh on both consumption as well as investment and have a more significant macroeconomic impact. But I think it is too early to say at this point in time exactly how damaging this could be.

QUESTIONER: Just one follow-up with reform. Could you elaborate more on the progress of regulatory reform that China has made to reduce its financial risk and how it is deleveraging process going? It seems to me in your report, we are concerned about the long financial sector debt. Could you elaborate more on that? Thank you.

MR. DANIEL: Good question, thank you. I would separate the debt problem into kind of two. There is the debt within the financial sector and there is the debt that goes from the financial sector to the real economy if you would like. We have seen very strong progress in the debt within the financial sector, that’s all these wealth management products, asset management vehicles and we have seen quite strong progress in reducing the interconnectedness. Banks no longer lending to each other so much or to all these other products. So there very strong progress.

I think there is more to be done. The new institutional structure that has been put in place needs to be made to work. There is a need for a longer-term plan to how to get rid of implicit guarantees that are still quite prevalent and of course the financial institutions in China have to get used to the new rules of the game. It is one thing to change the rules of the game, you have to change your business models. How are you going to make profit with the new rules? What is going to be your business line?

Now then we get to the credit that goes to the real economy. Now there has been progress here too but it has been slower and it is still growing too fast for comfort. It is not so much corporate credit that is the main problem right now, it is more household debt which is growing quite rapidly. I mean, we saw the numbers I think last month, mortgage debt still I think 20 percent year on year. And in our view local government borrowing is still quite substantial. Not necessarily the on-budget stuff but the off-budget local government financing vehicles, I think government guarantee funds. I think there is still quite a lot of borrowing going on outside the budget that will need to be controlled. So that’s where we see more of the to do list.

MS. YAN: Do we have more questions in the room?

QUESTIONER: Can I ask one more on opening up. I think you mentioned China should do more or do faster to the opening up policy, right. I want to ask you how fast? What is the criteria for China to, you know, to opening up? Is the trade war issue one of the factor to push China to, you know, faster its opening up? Thank you.

MR. DANIEL: Look, we are giving advice to China to open up for China's own interests. As we explained at the beginning, opening up has benefitted China a lot and we think it will continue to benefit China further. There are still many sectors that are quite protected, competition with foreign firms could be greatly enhanced. And I think that would be the benefits of China and also for the world economy.

In the current context to increased trade tensions and threats to the multinational trading system, I think China could play a leadership role and to do that, it should underscore it with actions to show that it is a leader and a defender, and as one of the main beneficiaries now and in the future, I think it would be a good move for China and appreciated by the rest of our membership if China could take the lead on showing that it is serious about opening up and supporting the multi-lateral trading system.

MS. YAN: Thanks. Any more questions? If not Sonali and James, do you have anything to add you want to highlight or?

MR. DANIEL: No, I think we said at the beginning. Thank you again for your interest.

MS. YAN: Okay. Thank you very much for your interest and time. Let me remind you again that the documents and this press briefing are both under embargo until 6 p.m. D.C. time. Thank you very much and have a nice evening. Bye.

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