China’s Growth: Can Goldilocks Outgrow Bears?

IMF Working Papers, May 27, 2015

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The paper analyzes recent growth dynamics in China, evaluating both cyclical positions and long-term growth prospects.
Financial cycles play a more important role than traditional inflation-based cycles in shaping the dynamics of growth.
The ‘finance-neutral’ gap—our measure of the financial cycle—is large and positive, reflecting imbalances accumulated in the economy since the Global Financial Crisis.
A period of slower growth is therefore both likely and needed in the near term to restore the economy to equilibrium.
In the medium term, growth will slow as China moves closer to the technology frontier, but steadfast implementation of reforms can ensure that China follows the path of the “Asia Tigers” and achieves successful convergence to high-income status.

Financial cycles outweigh traditional inflation-based cycles in driving growth dynamics.
The ‘finance-neutral’ gap is identified as large and positive, signaling accumulated imbalances since the Global Financial Crisis.
Policy implication: near-term slower growth is both likely and necessary to rebalance the economy.

Expectation of a period of slower growth to restore equilibrium given the current large and positive ‘finance-neutral’ gap.

As China moves closer to the technology frontier, medium-term growth will slow.
Successful convergence to high-income status is achievable if reforms are steadfastly implemented, enabling China to follow the path of the “Asia Tigers.”

Subject: Capacity utilization, Output gap, Potential output, Production, Productivity, Total factor productivity
Keywords: Asia and Pacific, Capacity utilization, China, economic miracle, Global, growth story, inflation dynamics, output gap, output gap estimate, output gap in China, output gap measure, potential growth, Potential output, potential output gap, production function approach, Productivity, TFP growth, total factor productivity, WP