IMF Executive Board Concludes 2016 Article IV Consultation with the People’s Republic of China

IMF News, August 12, 2016

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IMF Executive Board Concludes 2016 Article IV Consultation with the People’s Republic of China

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Bibliographic details

• Published: August 12, 2016

Overview and growth outlook

• Growth slowed to 6.9 percent in 2015 and is projected to moderate to 6.6 percent in 2016, owing to slower private investment and weak external demand.
• The economy is rebalancing in key respects:
  • Shift from industry to services.
  • Shift from investment to consumption.
• Lagging areas: strengthening SOE and financial governance, and containing rapid credit growth.
• Infrastructure spending picked up and credit growth accelerated in the second half of 2015.
• Accommodative macro policies are projected to continue supporting activity over the remainder of 2016.

Prices, exchange rate, and external sector

• Inflation:
  • Inflation dipped below 1.5 percent in 2015.
  • Inflation is expected to pick up to around 2 percent in 2016, reflecting the rebound in commodity prices and the exchange rate depreciation since mid-2015.
• Renminbi and external position:
  • After appreciating 10 percent in real effective terms through mid-2015, the renminbi has depreciated some 4.5 percent since then and remains broadly in line with fundamentals.
  • The current account surplus is projected to decline to 2.5 percent of GDP in 2016 (from 3 percent of GDP in 2015) as imports increase and the services deficit widens with continued outbound tourism.
  • The balance of payments came under pressure in 2015 due to large capital outflows, mainly related to repayment of external debt. The volume of outflows is expected to moderate in 2016.

Executive Board assessment — key messages

• Commendation for strong determination to achieve more balanced, sustainable growth and progress on structural reforms (interest rate liberalization, internationalization of the renminbi, and urbanization).
• Recognition of the 13th Five‑Year Plan and its ambitious goals centered on economic rebalancing.
• Transition risks:
  • The economic transition will be complex, challenging, and potentially bumpy, with heightened downside risks and eroding buffers.
  • Need for decisive action to tackle rising vulnerabilities and reduce reliance on credit‑financed, state‑led investment.
• Financial and SOE governance:
  • Urgency of addressing the corporate debt problem through a comprehensive approach.
  • Recommendations to harden budget constraints on SOEs; triage and restructure or liquidate over‑indebted firms; recognize losses and share them among relevant parties, including the government if necessary.
  • Piloting reforms in a few SOEs recommended as a strong start.
  • Complementary measures: targeted social assistance for displaced workers and initiatives to facilitate entry of new, dynamic private firms.
• Macroeconomic policy stance:
  • Macroeconomic policies should be geared at lowering vulnerabilities, which would likely entail somewhat slower growth in the short term.
  • Authorities’ intention to rely on fiscal support if growth falls sharply in the near term is welcomed.
  • Merit in using on‑budget, pro‑consumption measures to promote internal and external rebalancing (examples: raising pensions; increasing social, education and health spending; providing restructuring funds; cutting minimum social security contributions).
  • Continued efforts needed to ensure full implementation of the new budget law, improve fiscal transparency, and modernize the tax system.
• Financial stability priorities:
  • Encourage banks to proactively recognize loan losses and strengthen capital ratios.
  • Enhance supervisory focus on liquidity risk management and funding stability risks; address vulnerabilities in shadow products.
  • Major upgrade of the supervisory framework to foster cross‑agency information sharing and policy coordination, reduce regulatory arbitrage, and enhance crisis management capabilities.
  • Anticipation of the forthcoming Financial Sector Assessment Program Update.
• Exchange rate and capital account:
  • Staff assessment: renminbi broadly in line with fundamentals, although the external position in 2015 was moderately stronger than consistent with fundamentals.
  • Welcome steps toward an effectively floating exchange rate regime; encourage building on this progress while carefully managing the transition with a more market‑based monetary framework.
  • Support for a cautious, carefully sequenced approach to capital account liberalization aligned with exchange rate flexibility and financial sector reforms.
• Data and communication:
  • Encouraged continued improvements in data quality and policy communications to reduce uncertainty, align expectations, and guard against market turbulence.

Selected economic indicators (highlights and exact figures from tables)

• Real GDP (annual):
  • 2011: 9.5
  • 2012: 7.9
  • 2013: 7.8
  • 2014: 7.3
  • 2015: 6.9
  • 2016 (projection): 6.6
  • 2017 (projection): 6.2
  • 2018 (projection): 6.0
  • 2019 (projection): 5.9
  • 2020 (projection): 5.8
  • 2021 (projection): (value not provided in table)
• Consumer prices (average):
  • 2011: 5.4 (not listed above; table shows subsequent years)
  • 2012: 2.6
  • 2013: 2.0
  • 2014: 1.4
  • 2015: 2.1
  • 2016 (projection): 2.3
  • 2017 (projection): 2.4
  • 2018 (projection): 3.0
• Total social financing (TSF) growth rates:
  • 2011: 18.1
  • 2012: 19.1
  • 2013: 17.5
  • 2014: 14.3
  • 2015: 12.4
  • 2016 (projection): 12.7
• TSF in percent of GDP:
  • 2011: 157.9
  • 2012: 169.0
  • 2013: 180.0
  • 2014: 189.5
  • 2015: 198.4
  • 2016 (projection): 208.3
  • 2017 (projection): 217.4
  • 2018 (projection): 225.1
  • 2019 (projection): 232.0
  • 2020 (projection): 236.9
  • 2021 (projection): 241.6
• Household and corporate indebtedness:
  • Household debt (percent of GDP): 2011: 27.8; 2012: 29.6; 2013: 33.0; 2014: 35.3; 2015: 38.4; 2016: 41.8; 2017: 45.5; 2018: 49.1; 2019: 52.4; 2020: 55.3; 2021: 57.5
  • Nonfinancial corporate domestic debt (percent of GDP): 2011: 97.0; 2012: 104.7; 2013: 108.9; 2014: 112.8; 2015: 120.0; 2016: 127.4; 2017: 133.5; 2018: 137.5; 2019: 139.7; 2020: 140.2; 2021: 141.2
• General government (percent of GDP):
  • Net lending/borrowing: 2011: -0.9; 2012: -2.7; 2013: -3.0; 2014: -3.1; 2015: -2.9; 2016 (projection): -2.8
  • Revenue: 2011: 26.9; 2012: 27.7; 2013: 28.0; 2014: 28.6; 2015: 28.1; 2016 (projection): 27.5
  • Expenditure: 2011: 27.0; 2012: 28.4; 2013: 28.5; 2014: 28.9; 2015: 31.3; 2016 (projection): 30.8
  • Debt: 2011: 15.2; 2012: 15.9; 2013: 38.3; 2014: 38.6; 2015: 39.1; 2016 (projection): 39.3
• Balance of payments and reserves:
  • Current account balance (percent of GDP): 2011: 1.8; 2012: 1.5; 2013: 1.3; 2014: 1.0; 2015: 0.8; 2016 (projection): 0.6
  • Trade balance (percent of GDP): 2011: 4.1; 2012: 4.5; 2013: 4.3; 2014: 4.0; 2015: 3.8; 2016 (projection): 3.8
  • Services balance (percent of GDP): 2011: -0.6; 2012: -1.3; 2013: -1.6; 2014: -2.0; 2015: -2.3; 2016 (projection): -2.6
  • Gross official reserves (bn US$): 2011: 3,256; 2012: 3,388; 2013: 3,880; 2014: 3,899; 2015: 3,406; 2016 (projection): 3,181; 2017 (projection): 3,064; 2018 (projection): 2,993; 2019 (projection): 2,890; 2020 (projection): 2,813; 2021 (projection): 2,740
• Memorandum:
  • Nominal GDP (bn RMB): 2011: 48,604; 2012: 54,099; 2013: 59,696; 2014: 64,849; 2015: 69,630; 2016 (projection): 74,715; 2017 (projection): 80,118; 2018 (projection): 86,159; 2019 (projection): 92,834; 2020 (projection): 100,244; 2021 (projection): 108,246
  • Augmented debt (percent of GDP): 2011: 45.8; 2012: 47.1; 2013: 51.0; 2014: 51.8; 2015: 55.8; 2016 (projection): 60.4; 2017 (projection): 64.5; 2018 (projection): 67.8; 2019 (projection): 70.4; 2020 (projection): 72.2; 2021 (projection): 73.5
  • Augmented net lending/borrowing (percent of GDP): 2011: -6.0; 2012: -5.1; 2013: -7.6; 2014: -7.2; 2015: -7.8; 2016 (projection): -8.4; 2017 (projection): -8.2; 2018 (projection): -7.4; 2019 (projection): -7.0; 2020 (projection): -6.6

Policy recommendations (concise)

• Address corporate debt comprehensively: harden SOE budget constraints; triage, restructure or liquidate over‑indebted firms; recognize and share losses; pilot SOE reforms.
• Provide targeted social assistance for displaced workers and measures to encourage entry of dynamic private firms.
• Use on‑budget, pro‑consumption fiscal support if needed (raise pensions; increase social, education, health spending; provide restructuring funds; cut minimum social security contributions).
• Ensure full implementation of new budget law, improve fiscal transparency, and modernize the tax system.
• Strengthen financial supervision: bank loss recognition and capital strengthening; liquidity risk management; address shadow product vulnerabilities; upgrade cross‑agency supervisory framework and crisis management.
• Continue measured exchange rate flexibility and sequence capital account liberalization with exchange rate and financial reforms.
• Improve data quality and policy communications.

Press Release No. 16/374 — IMF Executive Board Concludes 2016 Article IV Consultation with the People’s Republic of China, August 12, 2016.

References

• The Executive Board
• Proactive Reforms Critical to China’s Medium-Term Growth Prospects
• Read the Report
• Read the Selected Issues
• People's Republic of China and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home