Risk control crucial to growth
More stimulus measures will be needed only if economy slows sharply, says IMF
Containing financial risks andavoiding further stimulus measures should be the main priorities for policymakers in China, as they contemplate fresh strategies for sustained economic growth, the International Monetary Fund said on Thursday. “We consider that vulnerabilities have risen to the point where containing them should be a priority. Therefore, additional stimulus should only be deployed if growth slows significantly below this year’s target,” David Lipton, first deputy managing director of IMF, told a news conference in Beijing.
The IMF retained its annual GDP growth forecast for China at 7.5 percent but lowered growth projections for next year from 7.3 percent to around 7 percent — a level that Lipton said is realistic if China carries out extensive financial reforms.
“We are not counseling stimulus at this point,” Lipton said when asked if he thought the government should do moreto shoreupflagging economic growth.
“We don’t think there are sufficient signs that would warrant that,” he said. “But we are counseling vigilance because there are various sectors where the future is somewhat uncertain.”
China has become too dependent on credit and investment, including in real estate, since the global financial crisis (in 2008), the IMF said in a statement after two weeks of talks with Chinese officials for its annual assessment of the nation’s economy.
“Continuing reliance on credit-fueled growth means that risks are still rising, and although the government still has sufficient buffers to prevent a disorderly adjustment and sharp growth slowdown in the near term, more sustained efforts to reduce vulnerabilities are necessary,” the statement said.
China’s total non-financial debt rose to 210 percent of GDP in 2013 from 197 percent in 2012, Zhu Haibin, chief China economist at JPMorgan Chase & Co, said in a report this week. Corporate debt rose to 130 percent of GDP in 2013 from 92 percent in 2008.
Fiscal reforms, strengthening of local government finances, liberalization of deposit interest rates and the introduction of deposit insurance to remove distortions in the pricing of risk and borrowing costs are other measures that need immediate attention, the IMF said.
China also needs to implement changes to bring its current account surplus “in line with fundamentals” which would support the country’s economic transition away from investment and savings, according to the IMF. These include greater exchange-rate flexibility by further widening the yuan’s trading band and reducing currency intervention “so that the exchange rate can find the market-clearing level as soon as possible”.
The IMF also urged the government to establish “a level playing field” for private and State-owned enterprises by opening up for competition the sectors that were hitherto reserved only for the SOEs. Such steps are necessary to make the market a more “decisive” force, it said.
The government had in March indicated that it was anticipating a GDP growth rate of 7.5 percent this year. However, the 7.4 percent year-on-year growth recorded in the first quarter has triggered concerns that China might miss the annual target for the first time in decades.
Although some experts have called for more decisive stimulus policies to ensure that the growth targets are met, Beijing has refrained from doing so. Lipton praised the government’s approach and urged it to “carry through the reform goals listed in the Third Plenum” (of the 18th Central Committee of the Communist Party of China).
According to Lipton, the Chinese regulators have taken several praiseworthy steps, like slowing credit expansion, cooling down the property sector and reining in shadow banking.
“We think these are risk reduction actions that have been well taken. It would not make sense to reverse these policies for the sake of growth, as the risks may return again,” he said.
“We believe that China should focus on having the fastest sustainable growth, rather than the fastest possible growth.”