## Proactive Reforms Critical to China’s Medium-Term Growth Prospects

_IMF News, August 11, 2016_

## Source details

**Canonical URL:** [Proactive Reforms Critical to China’s Medium-Term Growth Prospects](https://www.imf.org/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects)

## Other formats

- [Markdown version](/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects/index.md)
- [Structured JSON version](/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects/index.json)
- [Bundle manifest](/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects/bundle-manifest.json)

## Bibliographic details
- Published: August 11, 2016

---

### Growth outlook
- 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:
  - "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.
  - "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.

### Rebalancing progress (four dimensions)
- External rebalancing:
  - Progressed well—the current account surplus has come down a lot and net exports are not driving growth.
- Domestic rebalancing:
  - Progress uneven across three components: moving from investment to consumption, from industry to services, and reducing reliance on credit.
  - Strong progress on switching to services.
  - Reasonable progress on switching to consumption.
  - Little progress on reducing credit reliance.
- Environmental rebalancing:
  - Mixed results: energy intensity of growth has declined, but air pollution remains very high.
- Income distributional rebalancing:
  - 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.

### Pace of reforms and recent measures
- Overall pace described as strong, with impressive advances across a wide domain.
- Key reforms over the last 12 months include:
  - Modernizing the monetary framework and making it more market based, including a more flexible exchange rate regime.
  - Improving fiscal structure, for example, extending the VAT to all services and a new budget law to improve local government financial transparency.
  - 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.
- Areas with slower progress:
  - Strengthening corporate governance.
  - Preventing weak state-owned firms from borrowing more.
  - Tackling excessive corporate debt.
  - Opening up state-dominated service sectors.
- Consequences of uneven progress: worsened resource allocation, weakened longer-term growth prospects, and raised vulnerabilities.

### Risks
- Short-term risks (low probability):
  - Potential loss of investor confidence.
  - Renewed capital outflow pressures.
  - Disorderly corporate defaults.
  - A sharp fall in asset prices, amplified by an increasingly large, interconnected and opaque financial system.
- Medium-term risk:
  - 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.
- Upside risks:
  - Recent stimulus measures may have a longer-lasting impact.
  - Faster structural reform and curbing credit growth would significantly lift medium-term growth prospects and reduce downside risks.

### Policy recommendations and priority actions
- Priority: slow credit growth by tackling root causes, including:
  - The pursuit of unsustainably high growth targets.
  - Soft budget constraints on state-owned enterprises and local governments.
  - The web of implicit and explicit government guarantees.
  - Excessive risk taking in parts of the financial sector.
- Required policy measures:
  - Implement a comprehensive strategy and decisive measures to address the corporate debt problem.
  - Shift from public investment to fiscal measures that support consumption.
  - Boost bank buffers and rein in risks in the financial system.
  - Continue to make the exchange rate more flexible.
  - Strengthen transparency, both in communications and data.
- Social mitigation:
  - Address social costs such as layoffs with targeted assistance through earmarked budgetary funds.

### Corporate debt: strategy and steps
- Context and scale:
  - China’s corporate debt is approximately 145% of GDP.
  - Nonfinancial state-owned enterprises account for around half of bank credit but only produce about a fifth of industrial output.
- High-level decision needed:
  - Stop financing weak firms and accept the likely lower near-term growth to pave the way for restructuring.
- Operational approach:
  - Triage firms into viable (restructure) and nonviable (liquidate).
  - Recognize crystallized losses (for example on bank loans); regulatory authorities should encourage recognition.
  - Allocate recognized losses to banks, firms, investors and, if necessary, backstopped by the central government.
  - Restructure viable but weak firms using market-based, out-of-court processes supported by a strong market for distressed debt.
  - Address social costs with targeted budgetary assistance.

*Source: Proactive Reforms Critical to China’s Medium-Term Growth Prospects — IMF News, August 11, 2016.*

---

## Content in this bundle

- [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"}

---

## 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](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)

_Source: https://www.imf.org/en/news/articles/2016/08/11/14/40/na081216-proactive-reforms-critical-to-china-medium-term-growth-prospects_