Transcript of a Conference Call on China Article IV Consultation
IMF News, August 12, 2016
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- Published: August 12, 2016
Key messages (opening summary by James Daniel, Mission Chief for China)
- China’s economy continues to advance to a sustainable growth path.
- Structural shifts highlighted:
- growing importance of services relative to industry;
- consumption relative to investment.
- Less progress in reining in rapid credit growth.
- Reforms have advanced across a wide domain but have lagged in critical areas—especially on state owned enterprise reform and tackling excessive corporate debt.
- Vulnerabilities are still rising on a dangerous trajectory.
- Fiscal and foreign exchange buffers, while still adequate, are eroding.
- Near-term growth outlook has improved with recent policy support, but the medium-term outlook is clouded by:
- high and rising corporate debt;
- structural excess capacity;
- an increasingly large, opaque and interconnected financial sector.
- Urgent action is needed to ensure challenges remain manageable. Key areas for action:
- tackling the corporate debt problem;
- adjusting macro-economic policies for a moderate slow down;
- guarding against financial risks;
- continuing progress towards an effectively floating exchange rate regime;
- strengthening transparency especially in communications and data quality.
- Confidence expressed that Chinese authorities can meet the challenge and transition to sustainable, strong, inclusive, and greener growth.
Reform scenarios (explanation and intent)
- Scenarios described are illustrative to show risks around the baseline; not judged to be highly likely.
- "No reform" scenario:
- Characterized by reforms stalling, continued increasing credit intensity, and lack of action.
- Described as a fairly extreme scenario intended to show what could happen if reform goes into reverse.
- "Proactive reform" scenario:
- Described as recommended/first-best actions by the authorities.
- Illustrates that quick and decisive reforms likely entail a short-term cost (somewhat weaker near-term growth) but yield stronger, more sustainable medium-term growth.
- Proactive scenario outcome: "stable six and a half in the medium term" versus the baseline which "falls towards six and keeps petering off."
- Critical difference from baseline: extent to which excess credit growth is reined in and credit productivity is improved by switching resources from less profitable to more profitable sectors.
- Guidance to readers:
- See the "Authorities’ view" section, paragraphs 30 and 31 on page 21 for authorities’ perspectives.
- See the risk assessment matrix on page 54 for likelihood assessments and footnote probability details.
Financial system vulnerabilities and liquidity risks
- Rapid credit expansion, especially corporate credit, raises two issues:
- allocation of credit on the asset side (risk of credit events and efficiency of resource allocation);
- funding of credit (rising reliance on non-deposit domestic sources and interbank funding).
- Current assessment:
- Major crisis risk on the asset side is not judged to be immediate; risks are more about allocations and efficiency.
- Funding risk is the greater concern: a growing share of credit financed by non-deposit domestic sources (interbank market, shadow banking) could create unstable funding profiles over time.
- If the trend continues, in "two or three years out" an increasingly large share of credit could be financed by non-deposit sources, increasing liquidity risk.
- Description of a potential destabilizing liquidity event:
- Could arise if shadow credit products proliferate while funding relies heavily on non-stable wholesale/interbank sources and market-based investors lacking incentives to sustain liquidity during shocks.
- IMF Selected Issues notes (finance systems, shadow exposures, funding, and risk transmission) contain more detailed analysis (see paragraphs four through seven in that note).
Spillovers and global implications
- Rebalancing in China has already produced sizable global spillovers; sharpest impacts from earlier adjustments and commodity market corrections have likely been seen.
- Continued moderate adjustment and rebalancing will continue to produce spillovers, though likely more moderate if reforms proceed.
- Illustration of potential global impact:
- "One percentage point investment-driven drop in GDP in China" would give rise to a G-20 impact of "a quarter in terms of growth."
- A larger example: growth moving from "5 to about 3 percentage points" could translate to "0.5 off global growth" in a back-of-the-envelope sense (context provided in the Selected Issues section on Rebalancing in China: Global Spillovers).
- Severity and scope of spillovers depend heavily on the nature of China’s domestic developments and reform outcomes.
Exchange rate assessment and thresholds
- IMF assesses the renminbi in relation to a medium-term equilibrium consistent with macro fundamentals and global consistency.
- A rule-of-thumb noted in the call: movements on the order of "5 to 10 percent" outside benchmark ranges would trigger re-examination of consistency with equilibrium and could raise concerns about appropriateness.
- Market-driven temporary deviations for cyclical reasons do not automatically imply inappropriate policy or trigger multilateral action; assessment depends on medium-term fundamentals and broader global context.
State-owned enterprise (SOE) reform
- Recognition by authorities of the SOE problem and ongoing initiatives at central and local levels; actions vary in strength and coherence across jurisdictions.
- Recommendation:
- Set up a high-level group with a clear mandate to coordinate policy formulation across agencies and stakeholders to tackle systemic corporate debt problems.
- Implement high-profile pilot restructurings and liquidations of SOEs to demonstrate feasible, well-managed reform approaches.
- Rationale for pilots:
- Start in provinces/areas with relatively good labor markets to reduce social costs and test coordination, social support measures, budget discipline, restructuring tools, and to invite private/foreign participation.
- Caution on mergers:
- Mergers alone are not a panacea; their value depends on whether they produce operational improvements and productivity gains rather than simply combining weak entities.
Governance, coordination, and authorities’ engagement
- IMF mission engaged in "three and a half weeks of very intense discussions" in Beijing with continuous contact over the past year with senior authorities across ministries.
- Authorities recognize the challenges; signs of increased coordination observed:
- roundtable discussion in June;
- subsequent inter-ministerial meeting;
- issuance of guidelines;
- actions by financial authorities and local governments;
- occurrences of some enterprise defaults.
- IMF view: cautious optimism on increasing coordination and capacity to implement comprehensive reforms.
SOE regional and sectoral considerations (northeast, energy sector)
- Recommendation to begin visible, well-managed SOE restructurings where labor markets can absorb displaced workers more easily.
- IMF did not provide detailed sectoral prescriptions for the energy sector in this consultation; IMF focus is macro and structural aspects of SOE reform rather than detailed sector-level industrial policy.
Timing, publication, and procedural notes
- Press conference contents were under embargo until "9:00 a.m. Washington time which is 9:00 p.m. in Beijing, China."
- Release timing described as a joint decision among IMF offices and authorities; participants located across multiple time zones (Beijing, London, U.S.).
Other items
- IMF welcomed the PBC's approval of The World Bank’s intended issuance of bonds in Special Drawing Rights, SDRs, "of up to 2 billion in China's ... bank bond market."
- IMF members are exploring whether the SDR could contribute to the smooth functioning of the international monetary system; work ongoing.
Transcript of a Conference Call on China Article IV Consultation, August 12, 2016 — IMF Communications Department