IMF Staff Completes 2019 Article IV Mission to China

IMF News, June 5, 2019

Source details

Mission dates: May 23 to June 5, 2019.
Press release date: June 5, 2019.
IMF team leader: Mr. Kenneth Kang, Deputy Director of the Asia and Pacific Department.
Senior IMF participant: Mr. David Lipton, First Deputy Managing Director.
Senior Chinese officials met: People’s Bank of China Governor Yi Gang; Finance Minister Liu Kun; China Banking and Insurance Regulatory Commission (CBIRC) Chairman Guo Shuqing; China Securities Regulatory Commission (CSRC) Chairman Yi Huiman.
Statement emphasis: Views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

Growth projections:
- 2019: 6.2 percent
- 2020: 6.0 percent
- 2024: 5.5 percent (growth expected to gradually slow to 5.5 percent by 2024)
Trade-related shock specified: recent US tariff hike on US$ 200 billion of Chinese exports.
Inflation projection: Headline inflation is projected to rise to 2.3 percent in 2019, reflecting higher food prices.
Risk assessment:
- Uncertainty around trade tensions remains high and risks are tilted to the downside.
- The near-term outlook is particularly uncertain given the potential for further escalation of trade tensions.

Near-term policy stance:
- 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.
Contingent policy actions if trade tensions escalate:
- Additional policy easing would be warranted if trade tensions escalate further, putting at risk economic and financial stability.
- Example: A fiscal expansion that is centrally financed, pro-rebalancing, and targeted to low-income households could be used to stabilize the economy.
Fiscal and structural policy guidance:
- Enhance the social safety net with a more progressive tax system to discourage excessive household savings and boost consumption.
- Prioritize centrally financed, pro-rebalancing fiscal measures if stabilization is required.

Progress noted:
- Credit growth and corporate debt have been reduced thanks to efforts to strengthen financial regulation, reduce regulatory arbitrage, and improve the framework for financial supervision.
Remaining priorities:
- Fully implement announced regulatory reforms and continue structural regulatory reforms to reduce still-elevated vulnerabilities.
- Strengthen bank capital, especially for small and medium-size banks.
- Do not relax micro-prudential regulations, 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).

Assessment:
- China has made progress in reducing external imbalances over several years.
- The external position in 2018 was broadly in line with medium-term fundamentals and desirable policies.
Recommendations:
- Greater exchange rate flexibility and better-functioning foreign exchange markets would help the financial system prepare for more volatile capital flows.
- 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.

Structural progress:
- Progress on structural reforms has led to a further opening up of the economy and a greater role for market forces.
Reform priorities to boost productivity and longer-term growth:
- Reform state-owned enterprises (SOEs) to achieve competitive neutrality by hardening SOE budget constraints and removing implicit guarantees.
- Open up the service sector further.
- Liberalize product and labor markets to increase competition and flexibility.
- Modernize policy frameworks towards more market-based and transparent frameworks to manage an increasingly systemic and complex economy.
Trade system recommendation:
- China and its international 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.
- 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.

The IMF team thanked the authorities in Beijing and Guizhou for the discussions, meticulous organization, and warm hospitality extended throughout the visit.
The mission held highly constructive and candid discussions with senior officials, the People’s Bank of China, private sector representatives, and academics to exchange views on economic prospects, reform progress and challenges, and policy responses.

IMF Staff Completes 2019 Article IV Mission to China — Press Release No. 19/196