Transcript of Press Conference on the Conclusion of the 2019 Article IV Consultation with China
IMF News, June 5, 2019
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- Published: June 5, 2019
Growth outlook and near-term projections
- 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 U.S. tariff hikes on $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.
- Compared to previous projections in April, the 2019 forecast was revised down by 0.1 percentage point to 6.2 percent; this revision reflects a negative impact from tariff increases of about 0.2 percentage points and a positive impact from a somewhat more expansionary macro-policy stance of about 0.1 percentage point.
- If tariffs remain at current levels, the policy stimulus announced so far is considered sufficient to stabilize growth in 2019 and 2020. If tariffs escalate further, growth could be significantly affected and some additional policy easing would be warranted.
Trade tensions, global implications, and scenarios
- Renewed trade tensions are a source of uncertainty and are weighing on sentiment.
- 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 and avoid managed trade.
- A comprehensive agreement resolving U.S.–China trade tensions is recommended to support the international system.
- Scenario considerations:
- If tariffs remain at current levels: no additional policy easing needed.
- If tariffs escalate (e.g., a hypothetical 25% across-the-board increase referenced in discussion): growth would be significantly affected, and temporary, contained stimulus could be appropriate to stabilize economic and financial conditions.
- Policy responses should weigh both the negative impact of tariffs and the positive impact of policy measures.
Policy recommendations — fiscal, monetary, and exchange rate
- Fiscal policy:
- If additional stimulus is needed, prioritize a fiscal expansion that is centrally financed, pro-rebalancing, and targeted to low-income households.
- Recommended rebalancing measures include reducing relatively high social security contribution rates for low-pay workers and increasing spending on the social safety net, education, health, and employment insurance rather than expanding local-government infrastructure spending.
- Monetary policy:
- Monetary policy can play a role if the inflation outlook weakens; primary focus should be on domestic conditions and inflation risks.
- The IMF welcomes greater exchange rate flexibility; increased exchange rate flexibility should facilitate adjustment to external shocks and allow the exchange rate to serve as a shock absorber.
- Exchange rate and external assessment:
- The IMF’s multilateral assessment found that the renminbi in 2018 was broadly in line with medium-term fundamentals and desirable policies.
- Greater exchange rate flexibility and better-functioning foreign exchange markets would help prepare the financial system for more volatile capital flows.
Financial sector, credit, and debt vulnerabilities
- Credit and corporate debt:
- 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.
- Continued priority should be to fully implement announced regulatory reforms and pursue structural regulatory reforms to reduce still-elevated vulnerabilities.
- Household and private-sector debt:
- Household debt has increased rapidly: it is now about 50 percent of GDP compared to 20 percent of GDP just 10 years ago.
- Macroprudential tools (e.g., loan-to-value ratios) are recommended to address household debt risks.
- Bank resilience and lending:
- Bank capital, especially for small and medium-size banks, should be strengthened.
- Micro-prudential regulations should not be relaxed, even temporarily, for cyclical reasons or to offset tighter domestic financial conditions.
- Policies should increase lending to the private sector, complemented by a comprehensive plan to remove implicit guarantees for state-owned enterprises (SOEs) to improve credit allocation and efficiency.
- Supervisory stance:
- As regulatory standards improve, weaker financial institutions and riskier products may face consequences; such consequences should be contained with close supervisory management and available tools.
- Local government debt:
- Authorities have taken measures to rein in local-government debt, including tightening financial regulations and formally prohibiting illegal local borrowing, and shifting toward bond financing.
Structural reforms, competition, and SOE reform
- Structural reform priorities:
- Continue derisking and deleveraging to address financial vulnerabilities.
- Boost consumption while slowing the pace of investment.
- Increase the role of the private sector through further opening up of trade and investment.
- Modernize policy frameworks (fiscal, monetary, financial, and data) to manage an increasingly complex economy.
- Competition and SOE reform:
- Further opening up and reforms that enhance competition and market forces should continue to boost productivity and long-term growth.
- Liberalizing product and labor markets and opening the service sector would increase competition and flexibility.
- SOE reform should continue to achieve competitive neutrality by hardening SOE budget constraints and removing implicit guarantees; competitive neutrality aims to level the playing field between SOEs and private firms.
- The private sector is highlighted as a major driver of growth, jobs, and innovation; improving access to financing for private firms and allowing inefficient “zombie” firms to exit are part of recommended reforms.
- Interest-rate liberalization and monetary framework:
- Authorities aim to move toward an interest rate-based monetary policy framework, focusing on short-term interest rates (e.g., repo rate) and de-emphasizing the positive lending benchmark rate.
External position and social safety net
- External position:
- China has made progress in reducing external imbalances; the external position in 2018 was broadly in line with medium-term fundamentals and desirable policies.
- Social safety net and rebalancing:
- 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.
Key statistics and specific figures cited
- Growth projections: 6.2 percent (2019), 6.0 percent (2020), 5.5 percent (by 2024).
- Headline inflation projection: 2.3 percent in 2019.
- U.S. tariff hikes referenced on $200 billion of Chinese exports.
- Household debt: about 50 percent of GDP (now) versus 20 percent of GDP (10 years ago).
- Forecast revision: down by 0.1 percentage point for 2019 compared to April projections; tariff impact ~0.2 percentage points; policy stance impact ~0.1 percentage point.
- SOE contribution referenced as “about 20% or less” in one discussion point.
Transcript of Press Conference on the Conclusion of the 2019 Article IV Consultation with China, June 5, 2019.