## IMF Survey : China’s Transition to Slower But Better Growth

_IMF News, August 14, 2015_

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## Bibliographic details
- Published: August 14, 2015

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### Economic health check — growth and vulnerabilities
- China’s growth is expected to be 6.8 percent in 2015, down from 7.4 percent last year.
- The slowdown is in line with the government’s target of around 7 percent and reflects progress in addressing vulnerabilities, especially a needed moderation in real estate investment.
- The recent stock market correction will not derail the ongoing adjustment to a slower yet more balanced growth path.
- Key vulnerabilities identified: fiscal, real estate, financial, and corporate sectors.
- Progress noted:
  - Credit growth has slowed significantly over the past few years.
  - Shadow banking (borrowing from nonbank financial entities) has been reined in.
  - Investment is cooling, led by a reduction in residential real estate growth.
  - A new budget law was passed to address off-budget borrowing.
- Remaining needs:
  - Further progress to put vulnerabilities on a downward path, including a decline in the level of residential real estate investment.
  - Multiyear deleveraging to help close the credit gap.
  - Medium-term fiscal consolidation.

### Managing the slowdown — policy calibration and targets
- Growth calibration targets recommended:
  - Achieve growth of 6½-7 percent this year.
  - Achieve growth of 6-6½ percent next year.
- Monetary policy recommendation:
  - With growth on track in the targeted range and a benign inflation outlook, monetary policy should take a wait-and-see approach.
  - Significant easing risks exacerbating credit and investment vulnerabilities.
- Fiscal policy recommendation:
  - Fiscal policy should remain accommodative given headwinds from slowing credit and real estate investment.
  - Fiscal policy should consolidate gradually from next year to put public finances on a sustainable path.
- Policy trade-off highlighted:
  - “Going too slow will lead to a continued rise in vulnerabilities, while going too fast risks a disorderly adjustment.”
  - Structural reforms are the key to managing the trade-off and boosting potential growth.

### Structural reforms — financial sector and state-owned enterprises
- Broad reform direction: move to a more open and market-based economy with a more decisive role for market forces.
- Exchange rate policy:
  - IMF recommends China can, and should, aim for an effectively floating exchange rate regime within 2–3 years.
  - The new mechanism for determining the central parity of the Renminbi is a welcome step to allow market forces greater role.
- Financial sector reforms:
  - Advances include introduction of deposit insurance and progress in liberalizing interest rates.
  - Moving to a market-based financial system requires banks to set deposit rates, lending rates, and loan policies based on market and commercial conditions to ensure access to finance for future-growth companies.
- State-owned enterprise (SOE) reforms:
  - Deepen reforms to level the playing field between private and public enterprises to allow private sector growth and job creation.
  - Additional SOE reforms: increase dividend payments, strengthen governance, and allow exit of unviable state-owned enterprises.

### Strategic assessment and conclusion
- Since the global financial crisis, China relied on an unsustainable growth model of excessive credit and investment; the leadership has set a comprehensive reform agenda and made considerable progress in reducing vulnerabilities.
- The IMF urges acceptance of lower short-term growth to secure sustainable and stable long-term growth—a trade-off judged to be in China’s best interest.
- “China is now the world’s largest economy on a purchasing power basis,” and continued implementation of necessary reforms will determine future success.
- “The faster the progress, the sooner the growth-enhancing benefits will materialize.”

*Source: IMF Survey, August 14, 2015.*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Press release](http://www.imf.org/external/np/sec/pr/2015/pr15380.htm)
- [SDR basket review](http://www.imf.org/external/pubs/ft/survey/so/2015/POL080415A.htm)
- [Global outlook](http://www.imf.org/external/pubs/ft/survey/so/2015/NEW070915A.htm)
- [External imbalances](http://www.imf.org/external/pubs/ft/survey/so/2015/POL072815A.htm)
- [China and IMF](http://www.imf.org/external/country/chn/index.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar081415b_