Press Briefing 2021 China Article IV

IMF News, January 29, 2022

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The Chinese economy is slowing down; macroeconomic policy should adjust to protect growth.
- Monetary policy has moved toward accommodation, including recent policy rate reductions.
- Fiscal policy remains in consolidation mode and is subtracting from growth; IMF recommends a neutral fiscal stance in 2022.
Rebalancing away from investment and toward consumption will raise growth quality and help meet climate goals.
- Consumption is generally less carbon intensive than investment.
- Rebalancing can get China "15 percent closer to achieving its climate goals" than not rebalancing.
- Fiscal support should prioritize low-income households now and lay groundwork for strengthening social protection long term.
China faces a pronounced productivity slowdown.
- Aggregate total factor productivity (TFP) growth averaged "0.7 percent" per year over the last 10 years.
- This contrasts with "3.5 percent" TFP growth in the 10 years prior.
- Recommendations include reaccelerating SOE reform and implementing "competitive neutrality" reforms so private firms can compete on equal footing with state-owned enterprises.

IMF view on policy stance:
- Monetary: remain accommodative in 2022 given low inflation and slack; welcome recent policy rate and borrowing-cost reductions and LPR adjustments.
- Fiscal: shift from consolidation to neutral stance in 2022 to avoid further subtraction from growth.
Fiscal composition and targeting:
- Short-term: direct support to low-income households to boost consumption.
- Medium/long-term: improve social protection (social insurance, medical benefits, unemployment insurance, social assistance, pension reform) to lower household precautionary savings and support consumption-led growth.
Risks and monitoring:
- Watch for worsening growth momentum; be prepared to provide additional macro support if needed.

Current situation:
- Significant stress among developers (Evergrande noted as the starting point), with spillovers to other developers and potential contagion to the financial system and broader economy.
Short-term policy priorities:
- Intensify surveillance of developers and lenders; assess pressure points and interlinkages.
- Strengthen central government coordination of policy responses; improve policy communication.
- Ensure timely completion of pre-sold housing to restore confidence.
- Facilitate swift restructuring of troubled developers with differentiation between viable and non-viable firms; provide liquidity/support to viable developers.
Medium-to-long-term priorities:
- Strengthen macroprudential and real estate policies to limit demand-driven risks and address pre-sale practices.
- Continue strengthening bankruptcy processes for non-financial corporates.

Zero COVID measures initially effective in 2020–2021 but, since roughly last summer, outbreaks became more frequent and containment measures more frequent.
More frequent containment reduced consumption and contributed to a downgraded 2022 forecast.
Policy implications:
- Recalibrate and fine-tune containment measures to reduce disruption.
- Improve vaccine coverage and public-health resilience to reduce economic impact of outbreaks.

Impact of rising U.S. rates on China:
- IMF judges the impact would be small because China’s capital account is "still mostly closed" and structural inflows dominate; flows are relatively slow.
Exchange rate view:
- Renminbi movements have reflected changing macro positions during the pandemic (weakened during China’s early lockdown; later appreciated).
- IMF encourages continued exchange rate flexibility; fundamentals determine international currency use.
CBDC (e-CNY):
- China is advanced in CBDC pilots, including cross-border experiments.
- IMF: determinants of currency international use remain fundamentals (capital account openness, convertibility, trade invoicing); e-CNY alone unlikely to substantially change RMB’s international role without broader reforms.

Productivity:
- Aggregate TFP slowdown from "3.5 percent" to "0.7 percent" average annual growth across decades is a major headwind, especially as the workforce has stopped growing.
- Policy priority: deepen market-oriented reforms (SOE reform, competitive neutrality) to boost productivity.
Regulatory environment and policy uncertainty:
- Recent regulatory tightening in the technology sector increased policy uncertainty for firms.
- IMF stance: regulation to ensure fair competition and consumer protection can be appropriate, but must be implemented transparently and predictably to preserve efficient market operations.
International economic relationship:
- Decoupling in trade and FDI, particularly in technology, could harm productivity and growth in both China and partner economies; IMF encourages resolving issues within multilateral, rules-based frameworks.

China has set ambitious climate goals; implementation is the critical next step.
Policy recommendations to minimize tradeoffs with growth:
- Accelerate rebalancing toward consumption to achieve a double dividend (higher-quality growth and lower carbon intensity).
- Strengthen and price carbon via the emissions trading system (ensure firms pay for CO2 allocations and that prices influence investment decisions).
- Reform power-sector incentives and expand market-based policies across sectors.
- Expand green finance to mobilize investment for the transition.
Timing: greater early action and reforms make the transition more affordable and reduce growth tradeoffs over time.

Surveillance and communication:
- IMF staff emphasized the importance of intensified monitoring (developers, lenders) and better central coordination and communication of policy responses.
Hong Kong-related questions:
- IMF noted a separate Article IV for Hong Kong is being finalized; related questions about Hong Kong’s developments will be addressed in that report.
Administrative details and context:
- Press briefing date: January 28, 2022.
- Press officer: Ting Yan; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.
- Embargo reminder cited in the briefing: embargo until "3 a.m. Washington, D.C. time which will be 4 p.m. Friday, Beijing time."

Transcript of IMF press briefing on the 2021 China Article IV Staff Report (January 28, 2022).