Why the IMF boosted China’s GDP forecast
beijing — The International Monetary Fund (IMF) increased its estimate for China’s average annual growth rate through 2020, while warning that it would come at the cost of rising debt that increases medium-term risks to growth.
China’s economy will expand at an average pace of 6.4 per cent annually from 2017 through 2020, compared with a six per cent estimate a year earlier, the IMF said in its Article IV review. Household, corporate and government debt will increase to almost 300 per cent of gross domestic product by 2022 from 242 per cent last year, fund staff estimated.
President Xi Jinping has been pushing financial regulators to address excessive borrowing at state enterprises and has said their indebtedness is “the priority of priorities.” But ending the addiction to debt requires measures that include allowing companies to fail and sweeping shifts in the way capital is allocated that policy makers have yet to fully embrace.
“Given strong growth momentum, now is the time to intensify these deleveraging efforts,” the IMF said. “Reform progress needs to accelerate to secure mediumterm stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment.”
Sustainable credit
Lending to the private sector rose 16 per cent in 2016, twice the pace of nominal GDP growth, and since 2008 has risen about 80 percentage points to about 175 per cent of output, the fund said. Such large increases in other countries have been associated with sharp growth slowdowns and often financial crises, it said. IMF staff estimated that a healthier pace of credit growth would have kept real GDP growth around 5.5 per cent from 2012 to 2016, rather than 7.25 per cent.
China is transitioning to more sustainable growth, as reforms are advancing widely, policy makers have taken initial steps to facilitate private-sector deleveraging and credit growth and corporate debt are both increasing more slowly, the IMF said. Progress has also been made on reducing excess industrial capacity, strengthening local government borrowing policies and addressing financial sector risks, it said.
Expansion is expected to remain unchanged this year at 6.7 per cent owing to momentum from last year’s stimulus, the IMF said. Inflation also is seen unchanged from a year earlier at two per cent this year, it said. The future objective should be for policy makers to focus more on the quality and sustainability of growth and less on quantitative targets, it said.
Trade surplus
China’s current account surplus fell almost one percentage point to 1.7 per cent of GDP last year on stronger domestic demand, the IMF said. It’s forecast to fall to 1.4 per cent of GDP this year. The narrower surplus was driven by a sharp recovery in imports and continued strength in tourism outflows, the IMF said. It added that data limitations suggest tourism imports may be overstated by half a percentage point of GDP and said the surplus is still “moderately stronger” than is consistent with China’s mediumterm fundamentals. The yuan remains broadly in line with fundamentals, the report said.
For more sustainable growth, China must boost consumption and reduce its high savings rate in part by spending more on health care and pensions, the IMF said. At 46 per cent of GDP, China’s national savings rate is more than double the global average, it said.
China also needs to increase productivity, which can be done by better use of resources being allocated to unprofitable “zombie” companies, overcapacity industries and state-owned enterprises, the report said. It estimated that better allocation could increase the contribution of productivity to growth by one percentage point over the long term.