Press Release No. 19/196

IMF Staff Completes 2019 Article IV Mission to China

June 5, 2019

• China’s economic growth stabilized in early 2019 and is expected to moderate to 6.2 percent and 6.0 percent in 2019 and 2020, respectively. Uncertainty around trade tensions remains high and risks are tilted to the downside.
• China and its international partners should work constructively to address shortcomings in the trading system and enable a system that can more readily adapt to economic changes in the international environment. China can play an important role and would benefit from further opening up and other structural reforms that enhance competition.
• Progress on structural reforms has led to a further opening up of the economy and a greater role for market forces. To boost productivity and promote longer-term growth, further efforts are needed to reform state-owned enterprises (SOEs), open up the service sector, and modernize policy frameworks.

An International Monetary Fund (IMF) team, led by Mr. Kenneth Kang, Deputy Director of the Asia and Pacific Department, visited Beijing and Guizhou from May 23 to June 5, 2019, to conduct discussions on the 2019 Article IV Consultation. 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 policy discussions and met with People’s Bank of China Governor Yi Gang, Finance Minister Liu Kun, China Banking and Insurance Regulatory Commission (CBIRC) Chairman Guo Shuqing, and China Securities Regulatory Commission (CSRC) Chairman Yi Huiman, among other senior officials.

At the end of the visit, Mr. Lipton issued the following statement:

“After the slowdown in 2018, Chinese economic growth stabilized in early 2019 reflecting a wide range of policy support. Renewed trade tensions, however, represent a significant source of uncertainty which is weighing on sentiment. Our discussions in the past two weeks focused on the authorities’ policy agenda to support the economy amid rising trade tensions while continuing progress in shifting from high-speed to high-quality growth.

“Growth is expected to moderate to 6.2 percent and 6.0 percent in 2019 and 2020, respectively, as the planned policy stimulus partially offsets the negative impact from the recent US tariff hike on US$ 200 billion of Chinese exports. Growth is expected to gradually slow to 5.5 percent by 2024 as the economy moves towards a more sustainable growth path. Headline inflation is projected to rise to 2.3 percent in 2019, reflecting higher food prices. The near-term outlook remains particularly uncertain given the potential for further escalation of trade tensions.

“The policy stimulus announced so far is sufficient to stabilize growth in 2019/20 despite the recent US tariff hike. No additional policy easing is needed, provided there are no further increases in tariffs or a significant slowdown in growth. Exchange rate flexibility should increase to facilitate adjustment to the new external environment. However, if trade tensions escalate further, putting at risk economic and financial stability, some additional policy easing would be warranted. For example, a fiscal expansion, which is centrally financed, pro-rebalancing, and targeted to low-income households, could be used to stabilize the economy.

“The global economy would benefit from a more open, stable, and transparent, rules-based international trade system. China and its trading partners should work constructively to address shortcomings in the trading system and enable a system that can more readily adapt to economic changes in the international environment. China can also play an important role and benefit from further opening up and other structural reforms that enhance competition. Trade tensions between the U.S. and China should be quickly resolved through a comprehensive agreement that supports the international system and avoids managed trade.

“Credit growth and corporate debt have been reduced thanks to concerted efforts to strengthen financial regulation, reduce regulatory arbitrage, and improve the framework for financial supervision. Going forward, the priority should be to fully implement the announced regulatory reforms and continue with structural regulatory reforms to reduce still-elevated vulnerabilities. Bank capital, especially for small and medium-size banks, should be strengthened and micro-prudential regulations should not be relaxed, even temporarily, for cyclical reasons or to offset tighter domestic financial conditions. To improve credit allocation and efficiency, policies to increase lending to the private sector should be complemented with a comprehensive plan to remove the implicit guarantee for state-owned enterprises (SOEs).

“China has made welcome progress in reducing external imbalances over several years, and the external position in 2018 was broadly in line with medium-term fundamentals and desirable policies. Enhancing the social safety net with a more progressive tax system would help prevent external imbalances from re-emerging by discouraging excessive household savings and boosting consumption. Greater exchange rate flexibility and better-functioning foreign exchange markets would help the financial system prepare for more volatile capital flows.

“Progress on structural reforms has led to a further opening up of the economy and a greater role for market forces. Such structural reforms should continue to boost productivity and longer-term growth. Liberalizing product and labor markets and further opening up the service sector would increase competition and flexibility and allow China to benefit further from globalization. SOE reform should continue and help achieve competitive neutrality by hardening SOE budget constraints and removing their implicit guarantees. Managing China’s increasingly systemic and complex economy requires modernizing policy frameworks towards more market-based and transparent frameworks.

“We would like to thank the authorities in Beijing and Guizhou for the excellent discussions, meticulous organization, and warm hospitality extended to us throughout the visit."