Press Release No. 21/338

IMF Staff Completes 2021 Article IV Mission to the People's Republic of China

November 18, 2021

• China’s recovery is well advanced, but is unbalanced and momentum is slowing, even as downside risks are accumulating.
• To secure growth that is balanced, inclusive and green, macroeconomic policies need to be supportive. Reducing financial vulnerabilities will help protect the recovery, and reaccelerating structural reforms is key to raise productivity and sustain high-quality growth in the long run.
• China’s climate strategy is taking shape with the release of detailed action plans, engaging all levels of government.

Washington, DC: An International Monetary Fund (IMF) team, led by Mr. Helge Berger, Mission Chief for China and Assistant Director of the Asia and Pacific Department, conducted discussions virtually on the 2021 Article IV Consultation from October 28 to November 10, 2021. 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 and risks, reform progress and challenges, and policy responses. The IMF's First Deputy Managing Director, Mr. Geoffrey Okamoto, met with several senior officials for the policy discussions and issued the following statement at the end of the virtual visit:

“After strong containment efforts last year to keep the outbreak under control, a successful vaccination campaign has inoculated the vast majority of Chinese citizens. As elsewhere, however, the more contagious variants are posing challenges.

“The Chinese economy continues its recovery, but momentum is slowing. The slowdown is attributed to the rapid withdrawal of policy support and the lagging recovery of consumption amid recurrent COVID-19 outbreaks and lockdown measures. Recent power outages and a slowdown in real estate investment related to the ongoing policy effort to reduce leverage in the property sector are also weighing on growth. Regulatory tightening targeting technology sectors, while aimed at strengthening competition and data governance, has increased policy uncertainty.

“Downside risks to staff’s current forecast of GDP growth of 8.0 percent in 2021 and 5.6 percent for 2022, as reported in the October World Economic Outlook (WEO), are accumulating. Short-term risks include continued pandemic uncertainty, consumption weakness, and elevated financial vulnerabilities. Declining productivity growth, increased decoupling pressures, and a shrinking workforce pose longer-term headwinds to growth. Against this backdrop, core inflation is expected to remain subdued and CPI inflation should remain below the pre-crisis target of about 3 percent despite currently high PPI inflation. Staff will update its forecast for China in January.

“To secure ‘high-quality’ growth—growth that is balanced, inclusive and green—macroeconomic policies need to be supportive. Fiscal policy, which has been significantly contractionary this year, should temporarily shift to a neutral stance and focus on strengthening social protection and promoting green investment over traditional infrastructure spending. Given low core CPI inflation and still significant slack in the economy, monetary policy should be accommodative, which will also support the fiscal effort. Further increasing exchange rate flexibility will help facilitate adjustment to changing external circumstances.

“China also plays an important role in the global fight against climate change. Implementation of China’s 2030 carbon peaking and 2060 carbon neutrality goals has begun in all key ministries as well as local and central governments. The approach will be most successful if based on an early start and a comprehensive strategy that combines economic rebalancing towards a more consumption-based growth model with the use of carbon pricing tools such as an improved national emissions trading scheme, sectoral policies, and leveraging green finance to help achieve the climate goal while supporting high-quality growth.

“To safeguard stability, financial risks need to be addressed in a clear and coordinated fashion. Ongoing efforts to address high corporate leverage and phase out implicit guarantees for state-owned enterprises through regulatory strengthening should be accompanied by establishing market-based insolvency and resolution frameworks to safeguard financial stability and facilitate efficient credit reallocation and increase productivity. A comprehensive bank restructuring approach is needed to strengthen the banking system and improve its capacity to support the recovery.

“Simultaneous implementation of additional key reforms—including a further opening up of domestic markets, reforming state-owned enterprises, and ensuring competitive neutrality with private firms while promoting green investment and strengthening social protection—will support the transition to high-quality growth.

“China plays an important role in the multilateral effort to address global challenges. China can help end the pandemic crisis and secure an inclusive and green recovery by continuing its COVID-19 vaccine distribution, greening the Belt and Road Initiative (BRI), aiding the efforts to put the debt of low-income countries on a sustainable footing, including by implementing in a timely manner the G20 Common Framework for debt treatment by all relevant Chinese entities, and contributing to building a more open, stable, and rules-based international trade system.

“We would like to thank the authorities for the excellent discussions and support which made this virtual Article IV visit possible."