IMF Staff Completes 2017 Article IV Mission to China
IMF News, June 14, 2017
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Bibliographic details
- Published: June 14, 2017
Mission overview and context
- Press Release date: June 14, 2017
- Mission period: June 1 to 14
- Mission led by: James Daniel, Assistant Director of the Asia and Pacific Department
- Final policy discussions joined by: David Lipton, IMF First Deputy Managing Director
- Meetings included senior officials: Vice Premier Ma Kai; People’s Bank of China Governor Zhou Xiaochuan; Director of Central Economic and Financial Reform Leading Group Liu He; Finance Minister Xiao Jie; China Banking Regulatory Commission Chairman Guo Shuqing; China Securities Regulatory Commission Chairman Liu Shiyu
- Statement type: End-of-Mission press release conveying preliminary IMF staff findings; staff report to be prepared for the IMF’s Executive Board subject to management approval
Growth projections and risk assessment
- Staff project GDP to expand by 6.7 percent in 2017.
- Staff project GDP to expand by 6.4 percent annually on average between 2018-20.
- Key assessment: China continues to transition to a more sustainable growth path, but reform progress needs to accelerate to secure medium-term stability and to address the risk that the current trajectory could eventually lead to a sharp adjustment.
- Near-term risks: Some near-term risks have receded, but medium-term vulnerabilities remain.
Progress noted by IMF staff
- Policy support (expansionary credit and public investment) has helped maintain strong growth.
- Corporate debt growth is slowing, reflecting restructuring initiatives and overcapacity reduction.
- The house price boom is being gradually contained and excess inventory reduced.
- Local government borrowing frameworks are being improved and a blueprint for reforming central-local fiscal relations has been published.
- The creation of new businesses has tripled since the 2014 reform.
- Data weaknesses have been recognized and actions taken to improve integrity.
Core policy recommendations (high level)
- Switch faster from investment to consumption.
- Increase the role of market forces.
- Implement a more sustainable macro policies mix.
- Continue regulatory tightening to address financial sector risks.
- Tackle nonfinancial sector debt.
- Further improve policy frameworks and data coverage.
Specific recommended actions
- Boost consumption:
- Increase public spending on health, pensions, education, and transfers to poor households to reduce excessive precautionary savings.
- Make the tax system more progressive and greener to boost growth while reducing high income inequality and pollution.
- Increase market forces and SOE reform:
- Accelerate and broaden the existing reform agenda for state-owned enterprises (SOE), including phasing out implicit support and increasing tolerance for default and exit.
- Remove barriers to entry, especially in the highly closed service sector.
- Set more ambitious targets to reduce overcapacity in coal and steel sectors and other sectors, with greater reliance on market forces.
- Macro-policy mix and debt reduction:
- Focus more on the quality and sustainability of growth and less on quantitative targets.
- Pursue gradual fiscal consolidation.
- Adopt less accommodative monetary policy.
- Increase recognition of losses, especially for underperforming SOEs and zombie enterprises.
- Reduce the flow of new debt by cutting off-budget public investment and imposing hard budget constraints on SOEs.
- Financial sector policy:
- Continue the recent focus on tackling financial sector risks, even if this entails some financial tensions and slower growth.
- IMF will provide more detailed analysis and recommendations in the five-yearly Financial Sector Assessment Program (FSAP) review, expected to be completed by the end of the year.
- Monetary policy framework and capital account:
- Phase out monetary targets over the medium term.
- Resume progress towards a flexible exchange rate.
- Improve communications.
- Apply capital flow measures transparently and consistently.
- Sequence further capital account liberalization with supporting reforms, including an effective monetary policy framework, a sound financial system, and exchange rate flexibility.
- Central-local fiscal relations:
- Centralize some expenditure responsibilities, such as social insurance.
- Give local governments more revenue-raising authority and sufficient debt quotas to reduce reliance on off-budget borrowing and land sales.
- Data and transparency:
- Address remaining data gaps to further improve policy making and meet G20 commitments.
Concluding assessment
- IMF staff express confidence that, given China’s record of successful reforms and the authorities’ commitment, China can find its way through the challenges ahead.
- Staff appreciation expressed for the hospitality and productive discussions with Chinese authorities during the mission.
IMF Staff Completes 2017 Article IV Mission to China — Press Release No. 17/219, June 14, 2017