Managing China’s Economic Transition

IMF Blog, October 5, 2015

Source details

Authors: consumption, services, with less emphasis on debt-financed public investment.
Published: October 5, 2015

After 35 years of extraordinarily rapid growth, the Chinese economy is undergoing a major transition from export-led growth to a model increasingly driven by consumption and services, with less emphasis on debt-financed public investment.
The transition has been accompanied by a slowdown in imports and financial market volatility.
The process is essential to create a more inclusive economy that gives greater play to market forces and achieves safer and more sustainable growth.
Managing the transition involves a delicate balancing act for the Chinese government—implementing reforms while maintaining demand and financial stability.
As reforms proceed, effective governance of newly liberalized markets and enterprises will be critical, including hardened budget constraints for both state-owned and private firms and continued strengthening of the financial supervision framework.

The current pace of China’s slowdown remains in line with the IMF’s forecast (and that of the authorities themselves), although downside risks have increased.
Strengths supporting manageability of the slowdown:
- Strength of infrastructure investment.
- Strength of consumption—particularly in services.
Weaknesses observed:
- Activity has clearly weakened in manufacturing and construction.

China has adequate policy space should further policy stimulus become necessary to prevent growth from falling excessively.
The focus of such measures should target both demand and rebalancing:
- For example, by providing support for consumption, especially by the more vulnerable members of Chinese society.
It would be preferable to avoid the renewed use of debt-financed investment so as to prevent a resurgence of corporate leveraging.

Since the Global Financial Crisis, growth in China has relied heavily on investment and credit, with the biggest buildup of leverage going to:
- state-owned enterprises,
- the real estate and construction sectors, and
- weaker corporates.
These buildups created growing vulnerabilities which—while still manageable—cannot continue to accumulate.
Stock market episode:
- Fueled by strong credit growth, which has since slowed down, stock markets surged by over 100 percent between November 2014 and this past June—only to correct by 40 percent in recent months.
- The correction was probably necessary and had significant global spillovers.
- Expected direct economic impact is limited given the low degree of share ownership by Chinese households and the low share of equity in corporate financing.

The recent change in the exchange rate regime had large ripple effects, particularly in Asia, due to the uncertainty created by the move.
The change is consistent with the authorities’ intention to move to a more market-determined exchange rate.
Following a significant real appreciation over the past year, the renminbi has only depreciated by around 3 percent since the change.
This does not alter the IMF’s assessment that the exchange rate is broadly in line with medium-term fundamentals.

China’s size and integration into the global economy mean that its performance affects other countries.
Estimated spillover magnitude:
- A one percentage point slowdown in Chinese growth translates into a 0.3 percentage point decline for other Asian countries.
Recent experience suggests spillovers to China’s neighbors in Asia might have become even larger lately, coming not only through trade but also global financial market linkages.
Spillovers have been magnified by forces that extend beyond China’s border—including falling commodity prices and the prospect of an increase in U.S. interest rates—which could produce downward pressure on Asian neighbors.

Vigilance must remain the watchword:
- For China: focus on the downside risks.
- For the rest of the world: guard against potential spillovers.
Clearer communication to help guide market expectations would aid management of the transition.
If managed well, China’s transition could provide the basis for renewed economic strength in a region that has led the world in growth for several years.

Managing China’s Economic Transition — October 5, 2015

掌控中国的经济转型; iMFdirect博客; 2015年10月5日
- 掌控中国的经济转型; iMFdirect博客; 2015年10月5日 (Markdown version)
- 掌控中国的经济转型; iMFdirect博客; 2015年10月5日 (PDF)