## A Wish List for China’s Third Plenum

_IMF Blog, October 22, 2013_

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## Bibliographic details
- Authors: Anoop Singh
- Published: October 22, 2013

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### Financial markets — overview
- Author: Anoop Singh
- Date: October 22, 2013
- Context: IMF view that economic growth will slightly surpass this year’s official target, while identifying growing challenges that require accelerating reform ahead of the Third Plenum.

### The challenges ahead
- Three decades of unprecedented expansion have raised nearly 500 million people out of poverty.
- Key pressures and vulnerabilities:
  - Heavy reliance on capital accumulation and relocation of surplus labor from the countryside to urban factories.
  - Stock of credit among the highest in the world and growing fast, particularly in the non-bank segment.
  - In the past four years alone, the stock of credit as a share of GDP has risen from around 140 percent to 200 percent.
  - Non-bank intermediaries mobilize short-term deposits to lend for longer maturities without the same capital buffers, provisioning, or regulatory rules that banks adhere to.
  - Large buildup in debt, including at the level of local governments:
    - Infrastructure spending by local governments used as a counter-cyclical tool since the global financial crisis.
    - Because local governments are constrained in how they raise revenue and are not permitted to borrow directly from the markets, they channel infrastructure funding through off-budget financing vehicles.
    - Augmenting reported public debt to include this additional infrastructure-related borrowing, IMF’s sense is that the general government debt is around 45 percent of GDP (twice the official number).
    - This suggests less fiscal space to deal with unanticipated events than the reported headline number indicates.
  - Capacity continues to be built well ahead of final consumer demand and returns to capital are diminishing.
  - Demographic trend: surplus labor will be exhausted by around 2020, making it more difficult to offset diminishing returns by relocating surplus labor.
- Conclusion: The current growth model looks increasingly unsustainable.

### What’s to be done? (policy recommendations)
- Financial sector reforms (main dimensions):
  - Deposit rate liberalization.
  - Elimination of perceived widespread implicit guarantees on financial products and intermediaries through:
    - Introduction of deposit insurance.
    - A formal resolution framework for failing institutions.
  - Gradually move away from administrative guidance on credit allocation to adopting a policy rate as the main operating target for monetary policy.
  - Objectives: contain the buildup of risks, enhance the efficiency of investment, and boost household capital income.
- Fiscal reforms:
  - Give local governments authority over their own revenue sources more in line with their expenditure mandates.
  - Shift the tax burden toward progressive and efficient forms of taxation.
  - Channel dividend payments from state-owned enterprises to the budget.
  - Objectives: address vulnerabilities in local government finances, reduce excess investment, and boost household consumption.
- Structural measures (the third broad area):
  - Level the playing field within and across sectors through deregulation and easing barriers to entry (particularly in services).
  - Raise resource prices to rationalize investment and protect the environment.
  - Reform the hukou (household registration) system to improve labor market mobility and achieve a more efficient matching of workers to vacancies.
  - Objective: enable a shift toward a growth model less reliant on capital accumulation and more dependent on the efficient use of resources (‘total factor productivity’ growth).

### Eyes on the Third Plenum — timing and trade-offs
- Implementing significant reforms is a tall order and involves tough choices, including possibly accepting slower growth as the economy adjusts to the new path.
- Starting reforms now will allow China to sustain convergence to the level of higher income economies and deliver growth benefits more broadly and sustainably; delay increases the probability of stalled convergence.
- China’s leadership has indicated reform objectives; priority is to lay out and then implement concrete reform plans to manage the transition.
- Invoke of pragmatism: Deng Xiaoping’s maxim cited to underline expectation of far-sighted pragmatism at the Third Plenum.

*Source: A Wish List for China’s Third Plenum (IMF blog post).*

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_Source: https://www.imf.org/en/blogs/articles/2013/10/22/a-wish-list-for-chinas-third-plenum_