Transcript of the Press Briefing on the 2020 China Article IV Staff Report

IMF News, January 8, 2021

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China is recovering fast, ahead of most large economies, but the recovery is still unbalanced and facing significant downside risks.
Growth projections and related statements:
- Growth at around 2 percent in 2020.
- Growth around 8 percent in 2021; IMF staff note December numbers have been surprising on the upside and there are some upside risks to that forecast.
- IMF earlier reference: latest number cited by a questioner was 7.9 percent, a little lower than 8.2 percent (from November); staff describe this as a small revision relative to earlier projections.
Main concerns:
- Recovery relies mostly on public support; private investment has strengthened recently, but consumption is lagging.
- The level of consumption compared to its pre-crisis trend is still rather low.
- Staff estimate an output gap this year of 1.8 percent.
External and domestic downside risks:
- Pandemic risk remains prominent.
- Financial stability issues on the corporate and banking side.
- A more difficult external environment for China and its economic relations with other countries.

Two central short-term recommendations:
- Do not withdraw macroeconomic policy support prematurely.
- Adjust composition of macroeconomic support away from investment towards household support to directly help consumption; strengthen the social safety net.
Monetary policy guidance:
- Remain accommodative in 2021; underlying inflation pressures are quite low given a negative output gap.
- Avoid a macroeconomic support cliff; continue support while shifting composition toward consumption.
Fiscal policy guidance:
- Continue support in the short term while reorienting fiscal measures to facilitate the handover from public support to private consumption.
- Short-term fiscal measures that can act quickly include stimulus checks and extensions or easier access to unemployment insurance; some measures will take longer (e.g., improved delivery via FinTech).
- Example of social safety net gaps: unemployment insurance coverage is "spotty" — "one in three urban workers" is covered by employment insurance, and "one in five migrant workers".
Financial stability tools:
- Use macroprudential policies, regulatory and supervisory measures proactively to address financial stability concerns, allowing the central bank to focus on monetary objectives.

Reform areas highlighted:
- Continue SOE reform and reforms to ensure a level playing field between private firms and state-owned firms.
- Pursue structural reforms in the real sector to improve domestic sources of growth, especially given a less favorable external environment.
Productivity gap:
- On IMF staff numbers, "productivity across all sectors is around 30 percent of the global frontier."
Rebalancing infrastructure spending:
- Shift some infrastructure spending away from traditional projects toward "smart infrastructure" and "green investment" to support higher-quality growth.
International engagement:
- China’s actions on debt relief for low-income countries, pledges to help low-income countries gain access to affordable vaccines, and pledges on fighting climate change are highlighted as important global contributions.

Corporate debt and banking sector vulnerabilities:
- Corporate debt rose in the crisis and is estimated at "around 130 percent of GDP at the end of last year" (staff estimate).
- Concerns about declining quality of corporate debt and concentrations on bank balance sheets, especially smaller regional banks that showed stress pre-pandemic.
Recommended actions:
- Maintain careful withdrawal of direct support to corporates; ensure robust corporate restructuring mechanisms (legal and regulatory steps).
- Strengthen financial regulatory frameworks and reinforce banks’ balance sheets with high-quality capital (equity rather than debt).
- Construct frameworks for anticipated, well-understood bank restructuring that may include government support as last resort.

IMF view:
- China is at the frontier of central bank digital currency developments; benefits and risks must be studied carefully.
Potential benefits:
- Promote financial inclusion; help monetary policy transmission; facilitate targeted fiscal support to low-income households.
Key risks to assess:
- Operational risks (cyber-attacks) and other vulnerabilities of electronic monetary units versus printed notes.
- International considerations: any digital currency used in cross-border transactions raises issues (e.g., potential for currency substitution) that could affect macroeconomic policy.
AML/CFT and other regulatory assessments are needed before broader roll-out.

Property sector and regulatory steps:
- PBOC set caps for the proportion of outstanding property loans to total loans in five different bank tiers, effective on January the 1st; staff are studying the measure and have factored announced measures into baseline assumptions (including a normalization of real estate sector activity).
Exchange rate observations:
- IMF does not provide a formal exchange rate prediction.
- Staff note the renminbi has been "quite remarkably flexible": December 2019 around 6.9 versus the dollar; as China went into lockdown the exchange rate fell to "something like 7.2"; "today it's around 6.5 or even below."
- Flexibility is viewed as helpful for macroeconomic adjustment; staff assume continued flexibility.
External lending and Belt and Road:
- IMF welcomes China’s engagement in overseas lending when conducted transparently and for productive projects; transparency about amounts and purposes is important.
- Support for low-income countries in the short term includes IMF lending and G-20-organized debt relief, with China playing an important role.

Staff advice:
- Focus on broader concept of general government, including on-budget and off-budget local government activity.
- Medium-term fiscal consolidation is necessary to ensure stability while preserving capacity to support growth.
- IMF engaged in capacity development to help improve macro-fiscal frameworks and address hidden local government debt risks.

Pandemic management lessons for other countries:
- Rapid local restrictions, rapid testing, rapid tracing, and seeing measures through can allow economies to recover without waiting for vaccines.
- Digital enhancements of business and services can be effective where electronic communication networks exist.
- Vaccines remain ultimately necessary for full global recovery; China’s pledges to facilitate vaccine access for low-income countries are welcomed.

Transcript of the Press Briefing on the Publication of the 2020 China Article IV Staff Report, January 8, 2021 — IMF Communications Department