China’s short-term growth outlook has strengthened but there is growing risk of a sharp adjustment in the medium term due to reliance on stimulus to meet targets and a credit-expansion path that may be “dangerous”, says the IMF.
On Tuesday, the IMF raised its forecast for China’s average annual growth from 2018-20 to 6.4% from 6.0% and said there was now a greater chance that authorities would meet their target of doubling 2010 real GDP by 2020. But it warned of the consequences to long-term economic health. The main cost of stronger growth “is further large increases in public and private debt”, the IMF said in its annual review of China’s economy.
“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown”, the report reads.
The IMF estimated that China’s economy would have grown about 5.5% annually from 2012-16 if credit was expanded at a “sustainable” pace, compared to the average 7.25% it recorded. “The key policy imperative is to replace precise numerical growth targets with a commitment to reforms that achieve the fastest sustainable growth path.”
The IMF did not see China making much progress on reducing debt, with the report forecasting that its total nonfinancial sector debt will increase from about 235% of GDP in 2016 to more than 290% by 2022.
The fund projected that China’s nonfinancial debt to 2022 would rise “even more strongly” than it forecast a year earlier.
For 2017, the IMF expected China’s economy to grow 6.7%, unchanged from a forecast in July, above the government’s target of about 6.5%, though growth was likely to peak in the first quarter. China’s economy expanded 6.9% in the first half of the year.
The report also included views from Chinese government officials, who agreed that 2017’s growth would be likely to “exceed marginally” the 6.5% target, though they disagreed with the IMF on China’s debt, saying it was manageable and its growth was likely to slow.
The IMF said among the steps China should take to move to a sustainable growth model was reforming fiscal policy to support greater consumption, accelerate reform of state-owned enterprises (SOEs) and intensify deleveraging efforts.
Over the past year, the IMF said, China had made little headway on SOE reform but “substantial progress” in supervising “shadow” financing.
The IMF supported China’s recent policy tightening and increased oversight of financial risks, saying it should continue.
The report said China’s monetary policy had become more market-based as controls on credit as well as lending and deposit rates had been mostly removed, but that the People’s Bank of China should be given “operational independence” in setting interest rates. But that independence would mean its role should be narrowed to focus only on monetary policy with much greater transparency of policy moves, while macroprudential policy should be separate, the IMF said.
The IMF said China’s control over the yuan exchange rate and capital flows increased in the past year, and recommended progress should resume on moving towards a market-oriented rate. China has tightened its grip on capital outflows in 2017 as it aims to preserve foreign currency reserves after significant depreciation pressure on the yuan in 2016.
Reserves have increased in 2017 and the yuan has strengthened against a weak US dollar, though there has been no sign of loosening of capital controls.
The IMF said while China should move towards capital account liberalisation, only carefully targeted reforms should be considered in the near term.
Inequality — including disparities in income and opportunity — is forecast to increase, the report reads.
Reuters | BusinessLive