Transcript of a Conference Call on the China Article IV

IMF News, August 14, 2015

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IMF staff project GDP growth at 6.8 percent for 2015, down from 7.4 percent in 2014.
Staff noted the 6.8 percent forecast has been below consensus forecasts and that recent high-frequency indicators are consistent with the momentum built into the 6.8 percent forecast.
The slowdown from 2014 is broadly in line with the authorities' own target of around 7 percent and Staff's recommended range of 6.5 to 7 percent.
Near-term domestic and external risks are considered low, given existing buffers and policy tools.

IMF staff estimate a substantial real effective appreciation of about 15 percent as of July 2015.
Staff view that the renminbi has been brought to a level that is "no longer undervalued."
The external position is still assessed as "moderately stronger than fundamentals," implying a need to reduce excess savings and achieve sustained external balance over the medium term.
Recent exchange rate adjustments in August 2015 included a depreciation of less than 3 percent over several days; staff state this does not change their assessment that the currency is no longer undervalued.
The central parity mechanism change links the central parity more closely to the previous day's closing spot rate; the existing trading band is plus/minus 2 percent.
Theoretically, under the new mechanism the exchange rate could move by 10 percent in a week (based on band mechanics and central parity adjustments), but actual outcomes depend on implementation and any central bank interventions.

Authorities have embarked on a comprehensive reform program; considerable work remains in financial, fiscal, state-owned enterprises, and external sectors.
Reform priorities identified:
- Move to a more market-based financial system.
- Improve management of government finances.
- Level the playing field between state-owned enterprises and the private sector.
- Achieve an effectively-floating exchange rate within 2 to 3 years.
Insufficient progress in containing vulnerabilities and advancing structural reforms is identified as the biggest risk to the outlook; realization could result in a disorderly correction and/or a protracted period of slower growth.

China's equity market experienced a sharp correction in mid-June after a preceding rally.
IMF staff assess the correction as unlikely to have a large effect on the real economy and not yet posing systemic financial risks.
Government measures to support the market are "useful to prevent disorderly market conditions" but should be unwound as soon as possible to restore market orientation.

Greater exchange rate flexibility is important for China as it integrates into global financial markets and seeks market determination of prices.
Staff welcome the change toward a more market-determined central parity mechanism, viewing it as a step toward greater flexibility.
IMF advice emphasizes limiting intervention to smoothing during transition and gradually moving toward a float within two to three years.
The faster the progress on reforms, the sooner growth-enhancing benefits will materialize.

GDP growth projections and targets:
- IMF staff projection for 2015: 6.8 percent.
- 2014 GDP growth: 7.4 percent.
- Authorities' target: around 7 percent.
- Staff recommended growth range: 6.5 to 7 percent.
- Staff outlook aligned with May consultation: growth this year of around 6.8 percent; government forecast around seven percent.
Exchange rate and external metrics:
- Real effective appreciation: about 15 percent (as of July 2015).
- Earlier estimate at time of EBA/Article IV assessment: 12.5 or 13 percent appreciation.
- Recent depreciation noted: less than 3 percent over several days.
- Trading band: plus/minus 2 percent.
- Theoretical possible move under new mechanism: 10 percent in a week.
Other terminology preserved:
- Total social financing (TSF).
- External balance assessment (EBA).

IMF staff clarify they do not endorse moves in any specific direction (appreciation vs. depreciation) but welcome system changes that allow greater market determination.
Staff emphasize that implementation details and central bank actions will determine how close the system moves toward a true free float.
IMF discussions with Chinese authorities showed broad agreement on long-term objectives (market determination, independent monetary policy, flexible exchange rate), but immediate operational intentions were not the subject of detailed disclosure during consultations.
Sectoral outlook: secondary sector indicators (electricity production, industrial value added) show slower growth while the tertiary (service) sector remains resilient and is becoming a larger share of the economy; the labor market and consumption indicators are holding up well.

Transcript of a Conference Call on the China Article IV — August 14, 2015