Transcript of Press Call on the Publication of the 2019 China Article IV Staff Report
IMF News, August 13, 2019
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- Published: August 13, 2019
Key messages from opening remarks (James Daniel, Mission Chief for China)
- 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.
- A moderate slowdown is expected in 2019, and uncertainty around trade tensions remains high; risks are tilted to the downside.
- The 2019 consultation focused on shifting from high speed to high quality growth in a highly uncertain environment by stabilizing the economy while continuing deleveraging and strengthening rebalancing.
Five key policy elements recommended
- Adjust macroeconomic policies to allow for a more flexible exchange rate.
- Already announced policy measure should be sufficient to stabilize growth in 2019.
- 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.
- Improve external policies and frameworks.
- Work 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 would benefit from further opening up and other structural reforms that enhance competition.
- Continue strengthening the financial sector.
- Fully implement announced regulatory reforms.
- Strengthen bank capitol, especially for smaller banks.
- Enhance macroprudential tools to address vulnerabilities from rising household debt.
- Develop a clear resolution regime to facilitate exit of weak banks.
- Remove implicit guarantees and harden the budget constraint for state-owned enterprises to improve credit allocation.
- Boost competition.
- Open up nonstrategic sectors, particularly services, to private and foreign enterprise.
- Unify product markets across localities within China.
- Modernize policy frameworks.
- Eventually move to a single policy rate in the monetary policy framework.
- Reduce the misalignment of center-local fiscal responsibilities.
- Further improve transparency and statistics.
Exchange rate and external sector assessments
- The 2018 average value of the RMB was assessed as "broadly in line with medium term fundamentals and desirable policies" (i.e., not significantly over or undervalued).
- The IMF supports increased exchange rate flexibility for China and has encouraged authorities to continue along this path.
- Estimates in the staff report suggest little FX intervention by the PBC (see report, paragraph eight).
- Reserves have fallen since 2015 (noted as observable context for past intervention estimates).
- A more flexible, market-determined exchange rate would:
- Give monetary policy more room to address domestic conditions.
- Help absorb external shocks, including tariff shocks.
Numerical estimates on tariff impacts (as discussed in Q&A)
- Estimate cited in the report: If tariffs on the 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. (Reported figure: 0.8)
- The 10% increase already imposed was estimated to take off 0.3 from growth. (Reported figure: 0.3)
- James Daniel’s "back of the envelope" theoretical escalation from 10% to 25% was estimated at 0.5. (Reported figure: 0.5)
- These estimates depend heavily on financial market impacts and confidence effects.
Other factual points and clarifications from Q&A
- The IMF conducts multilateral assessments of members’ exchange rates and external sector policies as part of its external sector report, typically published in mid-summer; the Article IV assessment is done once a year.
- The staff report compared average effective exchange rates between Article IV cycles and noted that the estimate for May 2019 showed the yuan had depreciated about 0.2% relative to the prior Article IV average. (Reported figure: 0.2%)
- The IMF has strongly encouraged Chinese authorities to publish data on FX intervention.
- Discussions between the IMF and the U.S. Treasury on a range of issues are ongoing.
- Monetary policy advice: increasingly focus monetary policy on domestic conditions, with the exchange rate allowed to play more of a role in absorbing external shocks.
- If tariffs were significantly increased, a small, targeted, on-budget fiscal expansion could be appropriate to stabilize growth and support low-income households.