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IMF’s near-term economic outlook for China positive

Updated: Aug 14,2016 9:29 AM     Xinhua

WASHINGTON — The International Monetary Fund (IMF) said on Aug 12 that China’s near-term economic outlook is positive, with an expected growth rate as high as 6.6 percent this year.

“Many countries could only dream of achieving growth rates that China has and is likely to achieve, which also reflects positively on the reforms that Chinese policymakers have undertaken,” said James Daniel, the IMF mission chief for China.

He made the remark on Aug 12 as the financial institution released a report concluding its annual economic health check on the Chinese economy.

CHINA’S EFFORTS TO RE-BALANCE ECONOMY PAY OFF

Daniel praised the achievements China has made in its economic transition, which the IMF expects will continue and benefit the global economy.

Among them, China’s current account surplus now accounts for 2-3 percent of China’s gross domestic product (GDP), down from a peak of 10 percent. In addition, the income-labor ratio has improved while energy consumption per unit of GDP fell.

Remarkable progress has been made in adjusting the growth pattern, enabling a growing importance of services relative to industry, and consumption relative to investment.

According to the IMF report, China’s internal and external imbalance is expected to fall gradually due to aging and a stronger social safety net. Household consumption is expected to continue to pick up on the back of falling household savings and rising disposable income.

China’s strong growth, despite a slowed investment, was achieved thanks to increasing consumption, said David Dollar, a senior research fellow at the Brookings Institution, a Washington-based think tank, and a former official of the World Bank.

He believed that China’s economic growth is entering a positive cycle, as domestic consumption is continuously rising on the basis of wage hikes to motivate the expansion of services, which create more jobs expected to generate more income.

PROGRESS IN STRUCTURAL REFORM

China has made significant progress in many areas, notably interest rate liberalization, internationalization of the renminbi, and urbanization, said the report.

Consistent, well-coordinated and clearly-communicated policies are key to a smooth, successful transition of China’s economy, which will eventually benefit the global economy, according to the report.

“Overall, we are impressed by the broad range of reforms and change that is occurring in China. Over the last 12 months, the authorities have made vital progress in key areas, including the extending of VAT, the passing of a new budget law, the improving of rural land rights and the reform of the pension system,” said Daniel.

China has made great efforts to improve its social welfare system by expanding the coverage of its pension and health care system, a policy which, if continued, will support the transformation of the Chinese economy into a consumption-driven one, said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.

Noting that the renminbi is broadly in line with fundamentals, the IMF directors in the report welcomed steps toward an effectively floating exchange rate regime and supported a cautious approach to capital account liberalization that is carefully sequenced with the progress on exchange rate flexibility and financial sector reforms.

MANAGEABLE CHALLENGES

The IMF also pointed out that China’s economic transition may be rugged and rough. In the medium term, China’s economy faces high and rising corporate debt, structural excess capacity and an increasingly large, opaque and interconnected financial sector.

The foundation advised that China take measures to constrain the budgets of SOEs and local governments, enhance banking system’s risk resistance capability, guard against financial risks and increase fiscal support for consumption.

The report also showed that the Chinese government has recognized the corporate debt problem, and that favorable factors including strong deposits, sufficient anti-risk capability in the banking system and an improved capital market will help address corporate debt risks.

Lardy said that China is not facing a banking crisis, and that China still sees a high ratio of funding from deposit. Moreover, he said that most of the debt is renminbi debt, thus its reliance on wholesale financing is little.

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