An International Monetary Fund (IMF) team, led by Mr. Kenneth Kang, Deputy
Director of the Asia and Pacific Department, visited Beijing and Guizhou
from May 23 to June 5, 2019, to conduct discussions on the 2019 Article IV
Consultation. The mission held highly constructive and candid discussions
with senior officials from the government, the People’s Bank of China,
private sector representatives, and academics to exchange views on economic
prospects, reforms progress and challenges, and policy responses.
The IMF's First Deputy Managing Director, Mr. David Lipton, joined the
policy discussions and met with People’s Bank of China Governor Yi Gang,
Finance Minister Liu Kun, China Banking and Insurance Regulatory Commission
(CBIRC) Chairman Guo Shuqing, and China Securities Regulatory Commission
(CSRC) Chairman Yi Huiman, among other senior officials.
At the end of the visit, Mr. Lipton issued the following statement:
“After the slowdown in 2018, Chinese economic growth stabilized in early
2019 reflecting a wide range of policy support. Renewed trade tensions,
however, represent a significant source of uncertainty which is weighing on
sentiment. Our discussions in the past two weeks focused on the
authorities’ policy agenda to support the economy amid rising trade
tensions while continuing progress in shifting from high-speed to
high-quality growth.
“Growth is expected to moderate to 6.2 percent and 6.0 percent in 2019 and
2020, respectively, as the planned policy stimulus partially offsets the
negative impact from the recent US tariff hike on US$ 200 billion of
Chinese exports. Growth is expected to gradually slow to 5.5 percent by
2024 as the economy moves towards a more sustainable growth path. Headline
inflation is projected to rise to 2.3 percent in 2019, reflecting higher
food prices. The near-term outlook remains particularly uncertain given the
potential for further escalation of trade tensions.
“The policy stimulus announced so far is sufficient to stabilize growth in
2019/20 despite the recent US tariff hike. No additional policy easing is
needed, provided there are no further increases in tariffs or a significant
slowdown in growth. Exchange rate flexibility should increase to facilitate
adjustment to the new external environment. However, if trade tensions
escalate further, putting at risk economic and financial stability, some
additional policy easing would be warranted. For example, a fiscal
expansion, which is centrally financed, pro-rebalancing, and targeted to
low-income households, could be used to stabilize the economy.
“The global economy would benefit from a more open, stable, and
transparent, rules-based international trade system. China and its trading
partners should work constructively to address shortcomings in the trading
system and enable a system that can more readily adapt to economic changes
in the international environment. China can also play an important role and
benefit from further opening up and other structural reforms that enhance
competition. Trade tensions between the U.S. and China should be quickly
resolved through a comprehensive agreement that supports the international
system and avoids managed trade.
“Credit growth and corporate debt have been reduced thanks to concerted
efforts to strengthen financial regulation, reduce regulatory arbitrage,
and improve the framework for financial supervision. Going forward, the
priority should be to fully implement the announced regulatory reforms and
continue with structural regulatory reforms to reduce still-elevated
vulnerabilities. Bank capital, especially for small and medium-size banks,
should be strengthened and micro-prudential regulations should not be
relaxed, even temporarily, for cyclical reasons or to offset tighter
domestic financial conditions. To improve credit allocation and efficiency,
policies to increase lending to the private sector should be complemented
with a comprehensive plan to remove the implicit guarantee for state-owned
enterprises (SOEs).
“China has made welcome progress in reducing external imbalances over
several years, and the external position in 2018 was broadly in line with
medium-term fundamentals and desirable policies. Enhancing the social
safety net with a more progressive tax system would help prevent external
imbalances from re-emerging by discouraging excessive household savings and
boosting consumption. Greater exchange rate flexibility and
better-functioning foreign exchange markets would help the financial system
prepare for more volatile capital flows.
“Progress on structural reforms has led to a further opening up of the
economy and a greater role for market forces. Such structural reforms
should continue to boost productivity and longer-term growth. Liberalizing
product and labor markets and further opening up the service sector would
increase competition and flexibility and allow China to benefit further
from globalization. SOE reform should continue and help achieve competitive
neutrality by hardening SOE budget constraints and removing their implicit
guarantees. Managing China’s increasingly systemic and complex economy
requires modernizing policy frameworks towards more market-based and
transparent frameworks.
“We would like to thank the authorities in Beijing and Guizhou for the
excellent discussions, meticulous organization, and warm hospitality
extended to us throughout the visit."
