{
  "title": "Proactive Reforms Critical to China’s Medium-Term Growth Prospects",
  "publication": "IMF News, August 11, 2016",
  "sourceUrl": "https://www.imf.org/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects",
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  "summary": "Growth at 6.6 percent in 2016.",
  "publishDate": "2016-08-11",
  "sections": [
    {
      "heading": "Growth outlook",
      "content": "- Growth at 6.6 percent in 2016.\n- IMF projection: growth to decline moderately from 6.6 percent in 2016 to about 6 percent in 2018 and a bit further thereafter, assuming continued shift from investment to consumption and from industry to services.\n- Scenario outcomes:\n  - \"Pro-active\" reform scenario: faster structural reform progress would boost medium-term growth to about 6 ½ percent but entail weaker short-term growth as highly-indebted firms are restructured.\n  - \"No-reform\" scenario: limited reform progress and continued reliance on unsustainable policy stimulus would keep growth high in the near term but produce weaker medium-term growth and a higher likelihood of a sharp slowdown."
    },
    {
      "heading": "Rebalancing progress (four dimensions)",
      "content": "- External rebalancing:\n  - Progressed well—the current account surplus has come down a lot and net exports are not driving growth.\n- Domestic rebalancing:\n  - Progress uneven across three components: moving from investment to consumption, from industry to services, and reducing reliance on credit.\n  - Strong progress on switching to services.\n  - Reasonable progress on switching to consumption.\n  - Little progress on reducing credit reliance.\n- Environmental rebalancing:\n  - Mixed results: energy intensity of growth has declined, but air pollution remains very high.\n- Income distributional rebalancing:\n  - Mixed results: share of national income going to labor has increased, but income inequality remains very high with fiscal policy doing little to reduce it."
    },
    {
      "heading": "Pace of reforms and recent measures",
      "content": "- Overall pace described as strong, with impressive advances across a wide domain.\n- Key reforms over the last 12 months include:\n  - Modernizing the monetary framework and making it more market based, including a more flexible exchange rate regime.\n  - Improving fiscal structure, for example, extending the VAT to all services and a new budget law to improve local government financial transparency.\n  - Encouraging urbanization by improving rural land rights, making pensions more portable, and developing new urban registration systems so migrants can gradually qualify for basic social welfare and residency benefits.\n- Areas with slower progress:\n  - Strengthening corporate governance.\n  - Preventing weak state-owned firms from borrowing more.\n  - Tackling excessive corporate debt.\n  - Opening up state-dominated service sectors.\n- Consequences of uneven progress: worsened resource allocation, weakened longer-term growth prospects, and raised vulnerabilities."
    },
    {
      "heading": "Risks",
      "content": "- Short-term risks (low probability):\n  - Potential loss of investor confidence.\n  - Renewed capital outflow pressures.\n  - Disorderly corporate defaults.\n  - A sharp fall in asset prices, amplified by an increasingly large, interconnected and opaque financial system.\n- Medium-term risk:\n  - Slow progress on reform and continued reliance on policy stimulus and credit to achieve growth targets—this supports near-term growth but weakens medium-term productivity and raises risks as credit and debt build up.\n- Upside risks:\n  - Recent stimulus measures may have a longer-lasting impact.\n  - Faster structural reform and curbing credit growth would significantly lift medium-term growth prospects and reduce downside risks."
    },
    {
      "heading": "Policy recommendations and priority actions",
      "content": "- Priority: slow credit growth by tackling root causes, including:\n  - The pursuit of unsustainably high growth targets.\n  - Soft budget constraints on state-owned enterprises and local governments.\n  - The web of implicit and explicit government guarantees.\n  - Excessive risk taking in parts of the financial sector.\n- Required policy measures:\n  - Implement a comprehensive strategy and decisive measures to address the corporate debt problem.\n  - Shift from public investment to fiscal measures that support consumption.\n  - Boost bank buffers and rein in risks in the financial system.\n  - Continue to make the exchange rate more flexible.\n  - Strengthen transparency, both in communications and data.\n- Social mitigation:\n  - Address social costs such as layoffs with targeted assistance through earmarked budgetary funds."
    },
    {
      "heading": "Corporate debt: strategy and steps",
      "content": "- Context and scale:\n  - China’s corporate debt is approximately 145% of GDP.\n  - Nonfinancial state-owned enterprises account for around half of bank credit but only produce about a fifth of industrial output.\n- High-level decision needed:\n  - Stop financing weak firms and accept the likely lower near-term growth to pave the way for restructuring.\n- Operational approach:\n  - Triage firms into viable (restructure) and nonviable (liquidate).\n  - Recognize crystallized losses (for example on bank loans); regulatory authorities should encourage recognition.\n  - Allocate recognized losses to banks, firms, investors and, if necessary, backstopped by the central government.\n  - Restructure viable but weak firms using market-based, out-of-court processes supported by a strong market for distressed debt.\n  - Address social costs with targeted budgetary assistance.\n\nSource: Proactive Reforms Critical to China’s Medium-Term Growth Prospects — IMF News, August 11, 2016.\n\n---\n\n Content in this bundle\n\n- Country Report (PDF){rel=\"external\" type=\"application/pdf\"}\n- Country Report (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Country Focus\n- Press release\n- People’s Republic of China and the IMF\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects"
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    "Published: August 11, 2016",
    "Growth at 6.6 percent in 2016.",
    "IMF projection: growth to decline moderately from 6.6 percent in 2016 to about 6 percent in 2018 and a bit further thereafter, assuming continued shift from investment to consumption and from industry to services.",
    "Scenario outcomes:",
    "External rebalancing:",
    "Domestic rebalancing:",
    "Environmental rebalancing:",
    "Income distributional rebalancing:",
    "Overall pace described as strong, with impressive advances across a wide domain.",
    "Key reforms over the last 12 months include:",
    "Areas with slower progress:",
    "Consequences of uneven progress: worsened resource allocation, weakened longer-term growth prospects, and raised vulnerabilities.",
    "Short-term risks (low probability):",
    "Medium-term risk:",
    "Upside risks:",
    "Priority: slow credit growth by tackling root causes, including:",
    "Required policy measures:",
    "Social mitigation:",
    "Context and scale:",
    "High-level decision needed:",
    "Operational approach:",
    "[Country Report (PDF)](/external/pubs/ft/scr/2016/cr16270.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[Country Report (PDF)](/external/pubs/ft/scr/2016/cr16271.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[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](https://www.imf.org/en/News/Articles/2016/08/11/20/37/PR16374-China-IMF-Executive-Board-Concludes-2016-Article-IV-Consultation)",
    "[People’s Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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