Transcript of Press Briefing on China Article IV Consultation
IMF News, May 30, 2024
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- Published: May 30, 2024
Macroeconomic outlook and key projections
- GDP growth projections:
- 5 percent in 2024.
- 4.5 percent in 2025.
- Upward revisions of 0.4 percentage points for both 2024 and 2025 versus the April World Economic Outlook projections.
- Medium-term growth expected to slow to 3.3 percent (attributed to aging demographics and slower productivity growth).
- Inflation and output:
- Inflation is expected to rise but stay low as output remains below potential.
- Core inflation is projected to increase only gradually to average around 1 percent in 2024.
- Near-term assessment:
- Strong first quarter GDP growth in 2024 supports upward revisions (first quarter GDP growth cited as 5.3 percent year-on-year).
- Export growth in the first quarter cited at 5 percent, partly reflecting a correction from weak end-2023 export growth.
- Risks:
- Overall risks to the outlook are tilted to the downside, including from a greater or longer than expected property sector adjustment and increasing fragmentation pressures in global trade.
Property sector, fiscal stance, and financial stability
- Property sector:
- Ongoing housing market correction described as necessary to steer the sector toward a more sustainable path.
- Authorities have implemented measures including lending support for affordable housing and measures to boost demand for finished homes.
- Staff see scope for a more comprehensive policy package to address property sector issues, in particular:
- Deploy central government resources to help homebuyers of pre-sold unfinished homes (options: complete homes or compensate, whichever is less costly, with appropriate safeguards).
- Enable exit of insolvent developers from the market.
- Allow greater price flexibility to stimulate housing demand and restore equilibrium.
- Fiscal policy recommendations:
- Near-term fiscal policy should be geared to support domestic demand and mitigate downside risks.
- Fiscal policy should prioritize providing one off central government financial support for the real estate sector.
- Excluding this one-time property sector package, a neutral fiscal stance in 2024 would balance tradeoffs among supporting domestic demand, mitigating deflation risks, and managing unfavorable debt dynamics.
- China faces significant fiscal challenges, especially for local governments; sustained fiscal consolidation over the medium-term is needed to stabilise debt.
- Restructuring unsustainable debt of local government financing vehicles (LGFVs) can help reduce fiscal strain.
- Monetary and exchange rate policy:
- Monetary policy easing implemented so far in 2024 is welcome; scope exists for further easing given subdued inflation and output below potential.
- Greater exchange rate flexibility would reduce deflation risks and help absorb external shocks.
- Financial stability measures:
- Authorities have focused on vulnerabilities in the property sector, local government finances, and smaller financial institutions.
- Recommendations include strengthening the bank resolution framework and strictly applying credential standards to enhance financial stability and mitigate risk.
Trade, industrial policy, and multilateral implications
- Trade restrictions and fragmentation:
- Large increase in trade restrictions: 3,000 trade restrictions were imposed in 2023 compared to 1,000 in 2019.
- Early signs of fragmentation: trade across geopolitically aligned countries holding up better than across less aligned countries.
- Potential global GDP impact:
- If fragmentation is contained, cost could be less than half a percent of world GDP.
- If severe decoupling occurs across blocks, the Fund estimates a potential global GDP loss of around 7 percent over the medium-term.
- Industrial policy and subsidies:
- Industrial policy can address market failures but, if permanent or indiscriminate, can lead to distortions and misallocation of domestic resources and potential spillovers to trading partners.
- Evidence of retaliatory subsidy behavior: when one of the U.S., EU, or China puts a subsidy in place, there is a 75 percent probability the other country retaliates with another subsidy within the next twelve months.
- Recommendations:
- Scale back sector-specific support where it causes misallocation.
- Remove trade and investment restrictions that raise fragmentation pressures.
- Improve transparency and assess the aggregate level of support provided to sectors across multiple levels of government.
- Multilateral trade system:
- The preferred approach to addressing concerns about industrial policy and subsidies is multilateral — strengthening the World Trade Organization rather than unilateral actions.
- Continued engagement, open dialogue (including working groups between the U.S. and China), and cooperative progress in areas such as services trade and climate are constructive paths forward.
Structural reforms and medium-term policy priorities
- Key structural priorities to achieve high quality growth:
- Rebalance the economy toward consumption by strengthening the social safety net.
- Liberalize the services sector to boost growth and job creation.
- Pursue people-centered policies: education and health care to raise structural growth and human capital.
- Level the playing field among state-owned, private, and foreign firms; give markets a decisive role to boost productivity.
- Boost productivity through reforms (market-oriented policies, regulatory alignment, business environment improvements).
- Green transition and financing:
- China plays an important role in supporting debt restructuring in low-income countries and promoting the green transition.
- Green investment and targeted subsidies can be useful to address market failures, but overuse can lead to misallocation.
- The Fund advocates carbon pricing as an effective, fiscally responsible tool to support the green transition, complemented by targeted subsidies and measures to protect the vulnerable.
- Mobilizing private finance is essential given the scale of financing needs for the green transition; credible policy signals are required to attract private investment.
Technical and data issues raised in the briefing
- Goods trade surplus discrepancy:
- SAFE reports a surplus of about $600 billion while customs data reports over $800 billion for last year; this discrepancy appeared in 2021.
- Causes discussed: customs data record physical movement of goods; balance of payments (BOP) records transactions when ownership changes between residents and non-residents.
- The gap exists for all countries following BOP manual principles; detailed analysis to appear in the Staff Report to be published in a few months.
- IMF governance and quotas:
- Completion of the 16th Quota Review was highlighted: quotas were increased proportionately by 50 percent for everybody to restore a predominantly quota-based financing model.
- Work on realignment for governance to reflect the current global economy is ongoing, to be addressed in subsequent reviews.
Transcript of Press Briefing on China Article IV Consultation, May 29, 2024 — IMF Communications Department