Central Asia, Global View

IMF’s Annual Economic Report on China

According to article IV of the International Monetary Fund Agreement, the Fund organizes each year consultations with its member states. These consultations are concluded with a final report which includes present economic and financial information for that state. On the 15th of August 2017, the Executive Committee of IMF announced the finalization of China consultations, which continues its transition towards a sustainable economic growth according to the Monetary Fund. The significant input is offered by the Chinese strategy regarding the economic policies: supporting the applied policies, external supply and demand reform and capital management measures.

 The report identifies stimuli which maintain the economic growth at a high level, but still keep China economically vulnerable. Thus, there is a need for accelerating the reforms which aim to ensure medium-term stability. The expected economic growth rate has been reduced from 6.9% in 2015 to 6.7% in 2016, being within the Chinese authorities’ objectives. However, in the first semester of 2017 the reported number was 6.9%.

According to the IMF, the Chinese authorities are more focused on isolating the financial risks. By strengthening the environmental regulations, it has been managed to suppress the deflation and to reinforce the industrial profits, even if the bank interests have been abruptly risen since 2016.

Besides strengthening the financial conditions, the Chinese authorities have taken measures since 2015 to stabilize the exchange rates and to manage the capital flows. All these efforts combined with a low value of the American dollar helped reducing capital migration.

IMF considers that Beijing has potential in sustaining a strong economic growth on a medium-term level, but needs to accelerate the financial reforms in order to discourage the growth of bank credits. Also, it draws attention over the Chinese objective to double the GDP until 2020, Beijing intending to adjust the macro-financial policies based on the economic necessities. IMF also emphasizes that the Chinese authorities will maintain the actual level of public investment instead of decreasing the present deficit, already having deviations from 2016 predictions comparing with 2017 ones.

The IMF Report concludes that China uses its available fiscal resources to sustain an economic growth with a low stabilization degree, also vulnerable in the scenario of a financial crisis. Such a strategy can trigger the financial, cross-border integration withdrawal and capital flow risks.

The Chinese authority also emphasize the qualitative growth and not the quantitative one, considering that for 2017 the estimated growth rate of 6.5% has already been exceeded, therefore the economic growth will enter into a cool down phase for the rest of the year. The effects of these policies might produce a pressure on the currently raising inflation level, signals IMF. The Popular Republic of China considers that the objective of doubling the GDP by 2020 will be achieved without the risk of debts.

One measure that could be taken in order to stabilize the economic growth is to apply financial help for the weak firms and to enhance the cross-border fiscal efficiency, which will help China reduce its massive contributions towards the GDP investments percentage. In addition, a fiscal policy which can sustain the reorientation towards consumption and not investments would allow the former to rise and be financed by the population economies.

Both the resource allocation reforms with the accent on the low consumption of the population and massive national savings, and the taxation system reform are mandatory for helping the poor households, signals IMF. In addition, spending more on public health, both the pension and the education sector would improve towards achieving a medium and long – term economic growth.

On these points, the Chinese authorities agree with the IMF position that the real contributions of such spending are reduced by demographic factors, acknowledging that social assistance system reform is imperative.

According to the data provided by the IMF, the banking sector in China is one of the most developed in the world. Its size, complexity and interconnections make it highly exposed to financial instability risks. The recent growth of non-financial sector debts only increases the risk on medium term the macro-economic stability. The debt rate in 2016 for non-financial sector was about 25% of the GDP, while the private sector debts have been raised with 80%. According to the IMF, such increases have been associated with aggressive economic slowdowns. The Chinese authorities have understood the complexity of the financial sector, but consider that the risks can be managed on the spot.

The report shows the necessity of taking into consideration the relation between the debt governmental grade and the GDP, which is increasing. Chinese authorities are not agreeing with these statements, stating that the regulations took in 2014 have made the local government debts not being stipulated into the governmental sector. The efforts for regulating and supervising the risks have been upgraded together with a slowdown of the both corporative and local governmental debts, concludes Report of the IMF.

During the press conference organized on the 17th of August 2017, the Chief of IMF mission in China, James Daniel, offered a brief summary of the IMF drafted report, outlining that the debt projections represent a medium-term risk and need to be addressed in order to have a sustainable economic growth, introducing recommendations about: consumption growth by increasing social spending; the role of the market in reducing the subsidies given to the state owned companies and open them up towards the foreign and private sectors; reducing the debt rate of the private sector by continuing to tighten the financial regulations and a greater recognition of the inappropriate assets; and ensuring macroeconomic sustainability. In addition, he insists to highlight the qualitative objectives of the economic growth in the relation between central and local authorities.

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