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Transcript of a Press Teleconference Call with International Monetary Fund Officials on China's 2009 Article IV Consultation
July 24, 2009
MS. WONG: Good morning. This is Daisy Wong of the IMF External Relations Department. Thank you very much everybody for dialing to this conference call on China’s Article IV Consultation.
Hopefully, you have all seen the Public Information Notice, which is a summary of the Board’s discussion and some key findings on China.
I will turn this call over to Mr. Nigel Chalk and Mr. Vivek Arora. Mr. Nigel Chalk is the Mission Chief for China and the Assistant Director in the Asia and Pacific Department. Mr. Arora is the IMF Senior Resident Representative for China based in Beijing.
Mr. Chalk will make some introductory remarks, and then we’ll go to your questions.
This call is on the record, as you know. Thank you very much.
Over to you, Mr. Chalk.
MR. CHALK: Thank you, Daisy, and thank you to everybody who has called in to participate in this call.
I won’t reiterate the messages that were in the PIN. I think those are pretty self-explanatory, but I perhaps will give a little bit of background on the consultation.
We went to China in late May, early June. During the trip there, we visited Anhui Province. We went to Shanghai and Beijing. And we had a range of discussions with both the government, with financial institutions and with private sector participants, industrialists, a broad range of people. Of course, the context for the Article IV Consultation this year was the global financial crisis and the impact that that was having on China.
We had a quite constructive dialogue with the authorities, and I might say it was quite candid as well. At the end of the consultation, it was quite apparent that we had a fairly common view on both the diagnostics of what the issues were facing China’s economy but also on the policy response. I would also say that the main focus of the consultation this year was on the policies that would be needed going forward to both catalyze private consumption and to reorient investments in China, and we looked at that both in terms of the impact such policies would have on the Chinese economy but also on the international spillovers.
With those introductory comments, I think I will open it up now to questions.
Vivek Arora, our Senior Resident Representative, will also participate and answer some of the questions. So you can ask either one of us. I’ll turn it back to the moderator.
QUESTIONER: Nigel, if you could just address the currency issue and confirm reports that in the staff report as well the IMF staff determined that China’s currency is substantially undervalued and if you could discuss the issue of not using the label of fundamentally misaligned, which I understand was being considered at some point.
MR. CHALK: Yes. Okay, let me handle the second one first.
As you know, the original operational guidance of the 2007 surveillance decision, one of the ideas was to apply labels to countries, exchange rate-related labels, and terminologies as you had mentioned like fundamental misalignment. That operational guidance was revised in June, and on the Fund’s web site there’s a report indicating revisions.
I think the general view there was that the use of labels was proving an impediment to effective implementation of the decision. The whole goal of the decision was to increase the candidness and the clarity of Fund’s surveillance assessments including exchange rates assessments. And I think in some countries there was concern that the use of labels had actually weakened the candor of those assessments, and in others the Article IV had fallen behind schedule, and China was obviously one of those cases.
So I think the general sense was that there was a view that the original guidance on the implementation of that decision was undermining surveillance, and so that guidance was revised. As you said, those labels were thus not used in the China consultation.
On the issue of the exchange rate, I think in the Board assessment, there was general agreement that a stronger RMB would help in two dimensions. It would help boost consumption by reducing the price of tradable goods and increasing labor income, and, at the same time, it would provide incentives for greater investment in domestically-oriented sectors. So I think there was generally a view that a stronger RMB was preferred and would help with the broader rebalancing.
There was, as you can see in the PIN, differences in views in terms of the extent of which that would contribute to a rebalancing. Some directors had viewed the exchange rate as substantially undervalued. Others did not see it that way and saw it only having a lesser role in rebalancing. So I think there were some differences of views on the exchange rate.
But I think the other thing to note is that in the staff report, in our assessment, we saw the exchange rate issue as an important issue. It would help with rebalancing. Currently, the exchange rate does act as somewhat of a head wind towards rebalancing. However, we saw it in a broader context, that the exchange rate was one of a number of policies that would be needed, and the reliance on any one policy would not be sufficient, that you would need a broad range of policies including policies in terms of social sector, including policies in terms of capital market development, in raising the cost of capital and other inputs to production.
So I think the exchange rate was clearly an important part of this consultation, but I wouldn’t overemphasize that it was the central issue in this consultation.
QUESTIONER: Okay. But even though you don’t have to necessarily label the exchange rate, you still have to make a determination on how it’s valued as in the staff report, right? So what was your determination?
MR. CHALK: Yes, in the staff report, we assessed it as substantially undervalued.
QUESTIONER: Okay. Thank you.
MR. CHALK: Which is consistent with statements by the Managing Director in the past.
QUESTIONER: I was wondering what your staff determination was, how much the RMB is undervalued.
And the second point is there are differences between countries about that they feel that, well, the one the RMB is undervalued. And others thought that, well, right now, it’s not part. It’s really an impediment when it comes to the global crisis. I mean generally what is your feeling that the Chinese are moving enough and sufficiently on the RMB?
The other question I have is on interest rates. I was wondering if you feel that there’s a need right now for the Chinese to raise interest rates or do you think they should remain where they are?
MR. CHALK: Okay. Yes. As I said, we made an assessment in the staff report that there was substantial undervaluation. We didn’t make a quantitative assessment. We feel that given the current global climate it’s very difficult to put any particular point estimate on how large undervaluation is, but we do see a stronger RMB, as I said, as an important part of the broader policy package.
I think whether China has been moving enough, that’s a difficult question. If you look since 2005, we’ve seen around a 20 percent increase in the real exchange rate, which is a substantial increase in the exchange rate, in effective terms, that is. So I think how you assess what’s enough really depends on the horizon you look over, but obviously, if we see the exchange rate is undervalued, we do see further need for appreciation.
In terms of interest rates, I distinguish two issues there. One, I think we highlighted in the report that we saw a need for a structural increase in the cost of capital. So we feel that capital is cheap in China, and that does create incentives for highly capital-intensive investment particularly in tradable sectors. So we do see a need for an increase in the cost of capital.
As part of that, I think one of the things we highlighted was the need to gradually phase out the limits on deposit rates that can be offered by the banking system. Currently, there’s a ceiling on deposit rates which naturally, as those limits were moved, would increase the cost of capital.
In terms of monetary policy, I think our assessment was that right now the loosening of monetary policy that we’ve seen since late last year and through this year was appropriate. It was well calibrated for economic circumstances. We do see some risks in that expansion of monetary policy, and those would be related to credit quality as you have had a very large increase in credit growth.
And, as a result, I think going forward once we see evidence that the economic recovery is more firmly established I think we would favor a phasing out of the monetary policy stimulus prior to fiscal policy stimulus. In fact, I think we note in the report we see some scope for perhaps even a little bit more fiscal policy stimulus this year, the remainder of this year and next, as monetary stimulus is steadily withdrawn.
So I hope that answers both questions.
QUESTIONER: I had a question about the fiscal stimulus that you said there was more room for. I mean would it be similar in size to the current stimulus package and would it be -- is that something that should be considered or even implemented later this year or is it something more on the 2010 horizon?
MR. CHALK: Yes. As you know, there was a substantial stimulus package put in place in the fall of last year, and we thought that was pretty appropriate. That stimulus package was framed basically across two and a half years through the end of 2010. So there’s already a substantial stimulus in the pipeline.
A large part of that stimulus has come through infrastructure spending, and we also have seen stimulus coming now in terms of the government’s expansion of health care spending, which we’ll see probably more next year than this year, and also to some extent there’s been some steps forward in expanding pensions. So there’s already a lot of stimulus in the pipeline.
I think our concern was that the economic recovery was still not quite fully established. And so, in that context and given the risk of the global environment, we felt that there was probably some scope for maintaining that stimulus next year in terms of maintaining a fiscal deficit of about the same order this year as next year.
And I think we see some scope for reorienting some of that fiscal stimulus that we’ve seen away from infrastructure spending and towards more direct measures that would help with private consumption. There’s already been a number of measures aimed at boosting consumption in terms of consumption subsidies, in terms of reductions in some consumption taxes. We think those things are warranted and would help stimulate private consumption.
So some additional stimulus -- I don’t think we think of a large amount of additional stimulus, certainly nowhere near the scope of the stimulus amounts last year but on the margin perhaps some increased stimulus in those areas which could either come from an additional fiscal deficit or even just a reorienting within the existing plans.
QUESTIONER: Hi. I have two questions if that’s possible, and the first is about labor markets. You mentioned in your PIN that labor markets appear to be absorbing workers laid off from export industries. I guess how can you tell and where are the workers going would be my question on that.
The other one is you mentioned in your introduction that you have to take into account spillovers as well as simply a country’s own interest in policies, and that provides you with the motivation for changing exchange rate surveillance terms. How does that change your analysis? What concretely changes because you’re taking account of spillovers as well as simply the nation’s own concerns?
MR. CHALK: Yes. Okay. On the labor market, I mean there’s some information content I think in the official data, but it is quite difficult to figure out from the official data exactly what’s going on in large part, particularly with the migrant workers, in large part because of coverage of that data. So, in part, our assessment is based upon what we see in the numbers, but also some part of our assessment is based on what we see anecdotally. Maybe Vivek could talk to this since he’s in Beijing.
During the mission, we had spent some time in Anhui Province which is the source of migrant labor. It’s also a productive area that’s geared toward the domestic market. So we discussed with both the producers, with labor market groups and the Ministry of Labor officials there. We also talked to people in Shanghai and Beijing, similar sorts of groups.
I think our sense is that while there is certainly some dislocation in the labor markets as export sectors in the coastal regions have declined, but in general that process of reallocation of labor has been relatively smooth. Part of it has been that labor has returned back to export sectors, perhaps with some reduction in real wages, and been reabsorbed into those areas.
Part of it is that the interior of the country is doing quite well, and so some of that migrant labor has moved geographically across regions to where growth is stronger. And I think we’re seeing right now a dynamic where the historical pattern of very strong growth in the coastal regions and slower than average, national average growth in the interior is reversing, and you’re seeing much stronger growth in rural areas and in the interior provinces.
And some of that labor has been reabsorbed into public infrastructure projects.
So I think we see the labor markets as working relatively flexibly there. It’s not a perfect reallocation of labor. It’s not 100 percent, but it’s generally going relatively well, better than we had actually perhaps thought maybe at the beginning of this year.
I don’t know, Vivek, whether you want to add to that since you’re in Beijing.
MR. ARORA: I think there are two forces going on. The first one is that there’s a reallocation of production from the coastal areas, such as the Pearl River Delta which primarily serves the export market, towards some of the more inland production centers, like the Yangtze River Delta which is heavily involved in the production of consumer durables. And the strength in retail sales which has been focused on consumer durables has absorbed some of the labor that was laid off from the export industries.
And then, secondly, I think, as Nigel said, the fiscal stimulus has fallen very heavily on infrastructure spending, and that seems to have absorbed some of the labor in the inland areas.
I think there are still some outstanding concerns like college graduates and so on, but I think that on the whole the labor market situation is a lot better than one would have expected about a quarter ago.
MR. CHALK: Then, turning to your other question on spillovers and exchange rate, I mean clearly part of the Fund’s mandate is to look at country surveillance on a bilateral basis but also to set that in a multilateral context. And so, I think when we look at China’s economy, we do, institutionally, assess what the international spillovers will be and how large they’re likely to be.
I think our assessment is over the near term, given the way that growth is currently being driven largely by public spending, the import content of that public spending is relatively low compared to, say, private investment or exports which have been previously strong drivers of the economy. And so, in the regional context, we see perhaps less spillovers over the near term in the region except, of course, the commodity producers where infrastructure is highly commodity-intensive, and so there will be large spillovers to commodity producers such as Australia.
Over a longer horizon, I think part of the spillover issue is what motivates what we’ve been saying for quite a number of years about the need to rebalance towards domestic demand and particularly private consumption in China, and that’s related to unwinding the large global current account imbalances.
We do see that the set of policies that we advocated in the consultation, which were a range, as I said, a range of policies including near-term fiscal stimulus, some improvement in social policies particularly those related to health care, pensions and education, an increase in the cost of capital and an improvement in capital markets and financial market development. We think that set of policies alongside the exchange rate will help reduce global current account imbalances and so will have a healthy impact on the global economy from that sense.
We look at it from both angles. We look at it in what’s right for domestic policies. We look at what would be appropriate from the international context.
And I think in this case it’s quite clear to us that what helps in terms of reduction of global imbalances is also the right policies for China. We do see it very much in China’s interest, and I think the government also recognizes that. They’ve put a heavy premium on boosting private consumption, and they’ve really moved quite fast I think over the last year particularly in facilitating that.
So I think we look at it from an international context, but in bilateral surveillance our mandate is to advocate what we think would be the best policies for China, and I think both of those things are consistent in this case.
QUESTIONER: I want to ask you about data, the official data on China. There’s been a lot of skepticism about the accuracy of the data, especially given how fast they put it out. I wonder, do you, does the IMF do any information gathering on its own to see if the data are at least trending in the way the official data indicate?
MR. CHALK: Well, we do. We don’t do information gathering in the sense of gathering statistics. We see that as the role of the National Statistics Agency.
We do do information gathering in the sense of we try and look at the a broad range of data available to us at the Fund, not just from China but from other countries, and we can try and triangulate the data we see in China versus the data we see in the rest of Asia, the data we see in Japan, the Taiwan Province of China or Hong Kong for example. We can look to see whether that information is consistent. In that sense, we do feel that the information in China is consistent.
There are some issue with statistical data in China, but I don’t think they really change our view. I think it’s a question of extent. Maybe data are a little higher, a little lower, but I think the broad picture we see in China from the official statistics, we don’t have any concerns about that.
We do provide also a considerable amount of technical assistance to China on statistical issues, and so from that we also have some information. But I do think the concerns are probably somewhat overblown in terms of the accuracy of the data.
QUESTIONER: There was some disagreement in the PIN on how you would designate the exchange rate. I was intrigued by the fact that there was no disagreement about your recommendation on the advisability of greater flexibility on exchange rates, particularly the deposit rate. Should I interpret that as indicating that the Chinese authorities agree with you?
MR. CHALK: Just to clarify, the question was on deposit rates, on increasing flexibility of deposit rates?
QUESTIONER: Correct.
MR. CHALK: I think the central bank does see -- well, first of all, let me say they have moved forward quite a lot on increasing market determination of interest rates in China. I think you see that in the interbank market rates, and you see that in the corporate bond market rates. So there has been a lot of progress in terms of allowing the market to determine the cost of capital in China.
I think what we see as the one important remaining issue to handle is that on liberalizing both deposit and lending rates, particularly deposit rates, and removing the ceiling. That issue, I think, in principle the authorities agree with. I think there is a question of timing.
There is a concern--and I think you’ve seen this in other countries, in international experience--when deposit and lending rates are liberalized, you do run a risk to financial stability. There is an issue that perhaps banks start competing more aggressively for deposits and thus reduce their margins. There is an issue that perhaps banks increase lending rates and move into more riskier areas of operations. I think you need to combine that liberalization of deposit rates with a strong supervisory framework to make sure that banks are well behaved.
There’s another issue related to monetary policy. As you remove this tool of conducting monetary policy you’ll have to find more indirect tools with which to affect market interest rates and domestic liquidity.
So I think you need those preconditions in place in order to move forward on liberalization, which I think is why in the PIN and in our assessment we felt there needs to be a gradual approach, that there needs to be some care taken in moving forward on this.
So I think there is a question of timing as to whether the authorities feel the preconditions are fully in place in order to achieve that liberalization. But I think on principle they would agree that a market-determined interest rate is probably in China’s interest.
QUESTIONER: Why was there no Article IV consultation in 2008 or at least one that wasn’t released?
MR. CHALK: Yes. I think I had alluded to that in terms of -- there are a number of reasons why this consultation was delayed and we neither had a consultation in 2007 or 2008 that was discussed by the Fund’s Executive Board.
One of those reasons I alluded to earlier was related to this issue of labeling as part of the 2007 decision. So that became an impediment and made the Board meeting fall behind schedule.
Related to this, I’d just like to emphasize, because there’s some misperception I think in the broader media, the Board meeting was in no way blocked by the Chinese authorities nor was it vetoed by the Chinese authorities. This was more that there was an internal discussion of how best to move forward with the consultation. In the end, it was decided that this aspect of labeling was an impediment. And once that had been changed, the revised operational guidance did, then we moved ahead with the consultation.
There were also other issues unrelated to that. For example, in September of last year, the problems with Lehman Brothers meant that the focus changed towards the financial crisis and away from that particular China consultation. So there were other intervening factors, but I guess the main one I could point to is this issue related to the implementation of the 2007 surveillance decision.
QUESTIONER: Okay. Why were other Article IV Consultations able to happen in 2008 and 2007 then?
MR. CHALK: Well, I think actually there was a number of consultations that were delayed for similar reasons. So China was one of a range of countries.
QUESTIONER: Who else was delayed?
MR. CHALK: Let’s see. I think the consultations with -- sorry. There’s a list that I don’t have off the top of my head, but you could probably talk to Daisy and check.
So it wasn’t just China, and I think the revision to the 2007 guidance said there were a few members where their consultation had fallen behind schedule. So it wasn’t uniquely China.
MS. WONG: Well, at that point, the Fund was in the process of working on the 2007 surveillance decision, and so we’re not in a position to disclose information on those concerns.
QUESTIONER: I’ve just got a basic question. Is the PIN the only thing we’re going to get? Is there any prospect of your releasing the staff report or is that not something that happens or will happen in this case?
MR. CHALK: So there is, as you can see, there is an underlying staff report that was presented to the Fund’s Executive Board. It’s the decision of the Chinese authorities whether or not they choose to publish that report, and they’re currently considering that issue.
QUESTIONER: Okay. Is there a kind of time scale on how long they have to decide or could they release it at any time?
MR. CHALK: I don’t think they have a time frame. I would note that they have in the past published staff reports.
QUESTIONER: Yes, just very quickly. You mentioned you went to Beijing, Shanghai and a third place. I didn’t catch the third place.
MR. CHALK: We went to Hefei, Anhui Province.
MS. WONG: Okay. If there are no more questions, then I think we will conclude the conference call here.
So thanks very much again for participating. Good-bye.
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