Shoppers in Beijing, China. IMF says medium-term priority is to shift economy toward more consumption-led growth model (photo: Michael Reynolds/EPA)
ANNUAL CONSULTATIONS
But First Deputy Managing Director David Lipton said inflation was under control and Beijing had room to support activity in case of a more serious global downturn. China’s growth in 2010 was above 10 percent.
He welcomed a decision by the People’s Bank of China to cut interest rates by 0.25 percent, which “confirmed the authorities’ commitment to achieving their macroeconomic objectives in the face of slowing growth and increased downside risks, especially from Europe.”
Shift toward consumption
The medium-term priority was to shift China’s economy toward a more consumer-based growth model that also aims to address rising inequalities by promoting more inclusive growth. The IMF team was led by Markus Rodlauer. Lipton made these remarks after joining the final policy discussions in Beijing. He met with Chinese Vice Premier Wang Qishan and held in-depth discussions with People’s Bank of China Governor Zhou Xiaochuan, Finance Minister Xie Xuren, and other senior Chinese officials.
“This transformation would substantially boost living standards in China and contribute significantly to strong and balanced global growth,” Lipton told reporters in Beijing.
The IMF supported China’s ongoing effort to promote higher-quality growth while at the same time fine-tuning macroeconomic policies to help ensure that growth does not slow too much. China’s timely and large economic stimulus in 2009–10 had succeeded in supporting domestic growth, shielding China’s population from the worst of the crisis, and helping the global recovery by providing a needed lift to world demand, he said.
“China again has space for a forceful response if necessary,” Lipton added. However, any stimulus should be provided through budgetary measures and geared toward supporting the objective of medium-term rebalancing.
Further reforms needed
In this context, Lipton argued for a package of reforms “to achieve quality growth that relies less on investment, more on consumption, and is environmentally friendly.”
This package would include measures to raise household income, liberalize the financial system, strengthen social security while also lowering social contribution rates, further appreciate the exchange rate, and increase the cost of various inputs to production. Lipton noted that these priorities also featured in China’s 12th Five-Year Plan, “but timely implementation will be key.”
The reform process, he said, needed to go faster to avoid a further build-up of risks and ensure a smooth transition to consumption-led growth. “Otherwise, domestic imbalances may unwind in a disorderly fashion and trigger an abrupt decline in investment.”
Spillover analysis
Lipton highlighted analysis by IMF experts on the wider repercussions of an abrupt decline in investment in China.
“Our analysis, as part of the spillover report, indicates this would have a significant negative impact on China, commodity prices, and the global economy,”
More broadly, the spillover report highlights how closely interconnected the world has become, as well as the risks and tensions in each of the five major systemic economies—China, the eurozone, Japan, the United Kingdom, and the United States—and the need for a collective approach to resolving them.
Renminbi still undervalued, but only moderately so
Lipton said that over the past several years, China had made significant progress in reducing external imbalances with other parts of the world.
The current account surplus has declined sharply from 10 percent of GDP in 2007 to less than 3 percent of GDP last year. “This suggests that the undervaluation of the currency has been reduced,” Lipton said.
The Chinese renminbi was now no longer "substantially undervalued" but rather “moderately undervalued,” according to preliminary analysis by IMF economists.
Asia holding up
Despite the global slowdown, Asia has continued to enjoy robust domestic demand, reflected in low unemployment and continued credit growth in the region.
The IMF forecasts regional growth will be 6 percent this year, roughly the same rate as in 2011, and about 6½ percent in 2013. But there remains considerable regional variation. While emerging Asia will remain the fastest growing region in the world, led by China and India, industrialized Asia is projected to grow only at 2.2 percent.
