Transcript of Press Call on the Publication of the 2019 China Article IV Staff Report

August 13, 2019

James Daniel, Assistant Director, Asia Pacific Department

Ting Yan, Communications Officer, Communications Department


MS. YAN: Good afternoon, and good morning to those who dialed in from China. Thank you for joining today’s call on 2019 China Article IV Consultations Report. My name is Ting Yan. I’m Press Officer at the IMF. Our speaker today is Mr. James Daniel, Mission Chief for China, and Assistant Director of the Asia and Pacific Department. You should have seen the reports, which are already published on James will highlight some of the key messages in his opening remarks, and then we will be happy to answer your questions after that. James?

MR. DANIEL: Thank you, Ting, and thank you to everybody who’s dialed in. Thank you for your interest in our report. Let me just make a few words as introduction. Growth moderated in 2018, and, so far, in 2019, reflecting financial regulatory strengthening and softening external demand. Financial deleveraging and reduced interconnectedness between banks and non-banks have helped contain the buildup of financial risks, but vulnerability has remained elevated, and progress on rebalancing is mixed. While a moderate slowdown is expected in 2019, uncertainty around trade tensions remains high, and risks are tilted to the downside.

This year’s consultation focused on how to successfully shift from high speed to high quality growth in such a highly uncertain environment. This requires stabilizing the economy, amid rising trade tensions, while continuing with deleveraging and strengthening rebalancing. The five key elements are to, first, adjust macroeconomic policies to allow for a more flexible exchange rate. Already announced policy measure should be sufficient to stabilize growth in 2019. Although, given the recent increase in tariffs, a small fiscal expansion could be appropriate, which should be on budget, centrally financed, pro-rebalancing, and targeted to low income households to help maximize the multiplier effect, and contribute to lower poverty and inequality.

Second, improve external policies and frameworks by working constructively with trading partners to better address shortcomings and enable an international trade system that can more readily adapt to economic changes in this national environment. The global economy would benefit from a more open, stable, transparent, rules-based international trade system. China also has an important role to play in this regard, and would benefit from further opening up, and other structural forms that enhance competition.

Third, continue strengthening the financial sector by fully implementing the announced regulatory reforms, strengthening bank capitol, especially for smaller banks, and enhancing macroprudential tools to address vulnerabilities from rising household debt. Developing a clear resolution regime would facilitate the exit of weak banks. Removing the implicit guarantees and hardening the budget constraint for state-owned enterprises would improve credit allocation and limit state-owned enterprises’ advantage in accessing credit.

Fourth, boost competition by opening up nonstrategic sectors, particularly services to private and foreign enterprise, and unifying product markets across localities within China. Fifth, and last, modernize policy frameworks by eventually moving to a single policy rate in the monetary policy framework, reducing the misalignment of center local fiscal responsibilities and further improving transparency and statistics. Thank you.

MS. YAN: Thank you, James. Now, we can proceed to answer questions.

QUESTIONER: Hi. Thank you so much for doing this. I just wanted to be crystal clear about what you guys are finding in this report. I see that there is a portion where you guys talk about the exchange rate. You say that the decline that we see in the RMB, in your examination of that, suggests that there has been little currency intervention by the PBC. Is this sort of your way of saying that you don’t see any sign that China is manipulating its currency, and can you give us any update on the status talks with Treasury?

MR. DANIEL: Thank you. As we explain in the staff report, and, indeed, in the recently published external section report, we see RMB, in 2018, as broadly in line with medium term fundamentals and desirable policies, i.e. not significantly over or undervalued. We will conduct further analysis in 2020, as part of standard IMF processes, but let me offer some broader context.

We, at the Fund, have supported increased flexibility of China’s exchange rate, further rebalancing and opening up of the Chinese economy, and other structural reforms. For some time, in fact, we’ve been encouraging the authorities to continue along this path. A more flexible, market-determined exchange rate would help give monetary policy more room to address domestic conditions, and is in line with recommendations in the staff report. And our advice on rebalancing in the Chinese economy has been aimed at helping China reduce its excessively large current account surplus, which indeed has happened, and to ensure that this imbalance does not arise again. That means opening up more sectors to private and foreign competition, removing impediments to trade, reducing the dominance of the public sector in many industries, boosting consumption, and working with China’s international partners to improve the international trading system. We see continued rebalancing and opening up by China, and increased exchange rate flexibility as being in China’s own interest and would also benefit the global economy.

QUESTIONER: Can you update us on your status of talks with Treasury?

MR. DANIEL: Our discussions with the U.S. Treasury are ongoing on a range of issues.

QUESTIONER: Okay, fair enough. Thank you.

QUESTIONER: Yes, just to clarify, following the last question. Have you done any analysis, recently, of whether or not China is intervening in the currency markets, and, also, you say that you estimate that if tariffs on remaining 300 billion in Chinese imports to the United States were increased to 25%, it would cut eight tenths off of Chinese growth in the following 12 months. Can you update with the current status? In other words, can we assume half of the increased 10% would cut four tenths or three tenths off of growth?

MR. DANIEL: Thank you. On FX intervention, I would just point you to what we have on the report on that. I think that would be in paragraph eight.

MR. DANIEL: Estimates suggest little FX intervention by the PBC.

QUESTIONER: Yes, but that was last year. So, I just want to see if there was any update.

MR. DANIEL: We have nothing further to offer you on that one. I’ll also draw your attention to the fact that we have strongly encouraged the Chinese authorities to publish data on FX intervention. You also had a question, I think, on the impact of 25% on the 300 billion? The estimate we had in the report, of course, was without the 10%.

So, 25% from nothing would have been 0.8. Ten percent took off 0.3. So, my back of the envelope suggests 0.5, from a theoretical escalation from 10 to 25. Does that make sense now?

QUESTIONER: Yeah, that’s great, but, so, from -- with the 10% imposed, as of September 1st, that would -- you would estimate it at 0.3 -

MR. DANIEL: More or less.

QUESTIONER: Okay. Thank you.

MR. DANIEL: Obviously, these depend a lot about financial market impacts, confidence impacts, et cetera, but that’s our estimate.

QUESTIONER: Hi, James. Thanks for doing the call. I’ve got another question on foreign exchange issues as well. Given, you know, sort of the assessment that you made in the external sector report, I’m just wondering is it the IMF’s view that if, you know, that China’s recent support or the Yuan, you know, keep it at a stable level, you know, following the (inaudible) 2015 downdraft, is that something that’s been viewed as a positive thing, and, you know, would it be -- would we be seeing a significantly lower Yuan, if it was much more allowed to sort of react to market forces?

MR. DANIEL: Thank you. I think our two main takeaways for you, on this one, are that we see -- we assessed the 2018 average value of the RMB as broadly in line with fundamentals, and we have encouraged the authorities to move towards more flexibility in the management of the exchange rate, and they’ve been making progress in this regard, and we hope it will continue. In terms of estimates of intervention in the past, I think we’ve provided information on that, but you can see for yourself that reserves have fallen since 2015.

QUESTIONER: Perfect, and are you encouraging them to intervene much? I mean, is that what you’re saying, you know, by making it more flexible? That means less intervention, or -?

MR. DANIEL: Correct, less intervention. We -- our advice is to move towards more flexibility. We don’t rule out intervention, if necessary, in certain circumstances, but our basic line is more exchange rate flexibility.

QUESTIONER: Hi. Thanks very much for doing this call. James, apologies for pushing you, again, on the currency situation, but can I ask if you -- if the drop in the renminbi had happened within the timeframe of your report, would you be reevaluating your position on China’s intervention and currency markets and, indeed, in the value of the renminbi?

MR. DANIEL: You can certainly ask. I’m afraid we do this assessment once a year, and the reason why I can’t give you a direct answer to that is that it’s not just what happens to the RMB. You know, what happens to all the other policies in China, the fundamentals elsewhere in China, and other exchange rates across the globe? So, I’m not able to do that assessment for you at this stage.

QUESTIONER: Thank you, James, for doing this, and I also have a question regarding exchange rate. It said in the report that the estimate for May 2019 show that yuan has depreciated about 0.2%, according to the 2018 outreach. I was wondering whether you have any reason behind this, or any explanation why does the (inaudible) during this period? It didn’t give any more specific information, or does it mean that China has officially depreciated the exchange rate in the (inaudible) of itself? Thank you.

MR. DANIEL: That’s a purely factual statement. We just compare this Article IV to the last Article IV of the average rate, average effective rate, and that’s what the movement is.

QUESTIONER: -- so you’re not going to have -- further evaluate or any announcement before next annual report regarding this issue?

MR. DANIEL: Correct. We do a multilateral assessment of all our members’ exchange rate and external sector policies. We publish that in the external sector report, usually the middle of the summer, and that’s reflected, also, in the staff report, which is what you see, now.

QUESTIONER: Hi, James. Thank you for doing this, and I just want to clarify on two issues. One is that -- how do you comment on U.S. manipulation tag, or anything lately, and do you still maintain assessment in June that remain these not overvalued or undervalued and still suggest that (inaudible) enhances flexibility to absorb external shock, even in -- after the recent depreciation? Thank you.

MR. DANIEL: I’ve got nothing to add to the -- what I just said on the manipulation question, but, in terms of how we advise the authorities to respond to the recent tariff shock, I would point you to paragraph 24, the third bullet, where we say, under an adverse scenario, and this was back in July, the exchange rate should remain flexible in market, determined to help absorb the tariff shock.

QUESTIONER: HI, James. Thank you for doing this. So, my question is that for when you’re on the Chinese currency, like the Fed recently, last week, had (inaudible) and are the tariffs bring downward pressure to RMB. So, I’m wondering how do you see the different external factors that influence the RMB, and what do you think PBOC should -- that they could do anything regarding the complex external factors? Thank you.

MR. DANIEL: Yeah. There are certainly many complex factors. We -- I don’t want to speculate on what needs to be happening in its current situation, but our general advice is that monetary policy should increasingly focus on domestic economic conditions, while aligned exchange rate to take more of a role to absorb external shocks. Beyond those general framework answers, I don’t have anything more specific for you.

QUESTIONER: Hi, James. Thanks for having this. My question is about -- because, in this report, you said it’s unnecessary to take additional stimulus if there’s no further increase in target, but we see the trade tensions escalating. So, can you elaborate more about what kind of fiscal and other additional policies need to take to maintain the economic development and financial stability? Thank you.

MR. DANIEL: Sure. I just refer you to the remarks I made at the beginning, which actually took into account for this. The report that you have in front of you were sent to our executive board, in the middle of July, and is only issued now. So, please bear that in mind. It did not include the latest increase on 10%, on the additional imports.

My opening remarks, though, were up to date, and in those opening remarks, on the first point, I said that given -- although, given the recent increase in tariffs, a small fiscal expansion could be appropriate.

So, yes, you pointed out correctly that our advice had been that a fiscal expansion could be appropriate if tariffs were to be significantly increased, and, although the increase wasn’t quite as significant as the scenario we considered, it was still increased, and we think that a proportionately -- that that replies some kind of response, but on your more general question, I think there’s an awful lot that China can and should be doing to put its economy in the best possible position to deal with these kind of tensions, and that’s to continue with the reform and opening up.

That is very much in China’s own interests, as well as helping the global economy, and that’s to do with opening up more sectors to private and foreign competition, removing impediments to trade, reducing the dominance of public sector in many industries, boosting consumption, and there are a whole list of issues that I think is very much in China’s interests to do, which would also help the global economy and exports to China from many other countries. So, that’s our main piece of advice there.

MS. YAN: Thank you. If we don’t have any more questions, we will conclude today’s press call. Thank you, James, and thank you, everyone for joining us today. We will publish the transcript later today or tomorrow, and then, if you have any questions, please email me at Thank you.

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