On July 15, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with China.1
China’s economy remains on a solid footing, propelled by vigorous domestic and external demand. Wage and employment increases have fueled consumption, the expansion in infrastructure and real estate construction has driven investment upward, and net exports are once again contributing positively to economic growth. Consumer price inflation has been a pressing social and economic issue, rising to 5½ percent by end-May. However, barring further food price shocks, and assuming the ongoing tightening of monetary policy is continued, inflation should soon peak and begin to decline in the second half of this year.
The improving cyclical outlook for the economy, price pressures, and the potential for a worsening of bank credit quality in the coming years, has led to a withdrawal of monetary stimulus (with a target of 16 percent M2 growth by end-year). The fiscal stimulus has also begun to be unwound with a 1 percent of GDP decline in the general government deficit targeted for this year. In addition, fiscal resources are being reoriented toward supporting social expenditures, rural development and policies that promote private consumption. Over the past year the currency has appreciated by 5½ percent against the U.S. dollar but has depreciated in both nominal and real effective terms. International reserves now stand at over US$3 trillion. The policy measures outlined in the Twelfth Five-Year Plan are directed at shifting toward a consumer-based growth model through a range of reforms that will strengthen the social safety net, raise household income, enhance productivity, and invest in human capital. Financial reform is highlighted as an important element of this reform package. A successful implementation of such reforms, and the accompanying transformation of China’s economic growth model, would have significant positive spillovers to the global economy.
Executive Board Assessment
Executive Directors noted that China’s near-term growth prospects continue to be vigorous and are increasingly self-sustained, underpinned by structural adjustment. While inflation is expected to subside reflecting ongoing monetary policy tightening, upside risks remain, in particular from higher food and commodity prices. Asset price developments and continued rapid credit growth, coupled with global liquidity conditions, pose policy challenges. Directors agreed that the current environment calls for a further tightening of macroeconomic policies. The acceleration of China’s economic transformation toward a more inclusive and balanced growth model as envisaged under the Twelfth Five-Year Plan will improve the welfare of the Chinese people and contribute to sustained and balanced global growth.
Directors welcomed steps to cool down property price inflation. They emphasized that any durable solution to property bubbles would need to involve a significantly higher cost of capital, financial development, and higher real estate taxation.
Directors noted heightened risks to credit quality associated with lending to the real estate sector and local government financing vehicles, with the potential for contingent fiscal liabilities. They welcomed steps to improve public disclosure of the scale and nature of these liabilities, and encouraged continued efforts to ensure that banks fully account for the underlying risks with appropriate provisioning, capital requirements, and risk weighting.
Directors welcomed the authorities’ commitment to move gradually to more price-based tools of monetary policy, and to continue to improve the monetary policy framework and the interest rate structure. They saw room for a further tightening of monetary conditions through greater reliance on interest rates and nominal exchange rate appreciation, while taking care to safeguard financial system stability.
Directors generally agreed that, over the medium term, a stronger renminbi would be an important component in rebalancing the economy toward domestic demand, and a number of them saw this as a prerequisite for reforms to strengthen the macroeconomic policy framework and promote financial liberalization. Directors stressed that the appreciation of the exchange rate would need to be supported by wide-ranging reforms to bring about a transformation of China’s economic growth model.
Directors supported the policy directions laid out in the Twelfth Five-Year Plan, which, if fully implemented, would lay a strong foundation for a new growth model. They welcomed in particular the focus on further improvements in the social safety net, measures to raise household income, and the role of market forces in resource allocation. Directors encouraged the government to flesh out detailed steps for the expeditious initiation of the various reform measures.
Directors welcomed China’s participation in the Financial Sector Assessment Program, and underlined the importance of well-sequenced financial liberalization and reform as an integral part of China’s rebalancing strategy. They commended the authorities for the considerable progress in moving toward a more market-based financial system and improving the regulatory and supervisory framework. Directors encouraged further efforts to absorb the liquidity overhang currently resident in the financial system, deepen the channels for financial intermediation, enhance supervision and regulation, establish a deposit insurance scheme, and strengthen the framework for resolution and crisis management. They looked forward to meaningful progress in these areas to help pave the way for full liberalization of deposit and loan rates, an opening of the capital account, and a convertible renminbi.
Directors welcomed the spillover analysis for providing a useful multilateral perspective to the Fund’s policy advice to China, and encouraged further refinement of such analysis. They agreed that expansionary policies in China during the crisis had played an important role in bolstering global stability and growth, and expected China’s positive externalities to continue, especially for regional economies. Directors generally noted that a major disruption in China’s so-far-steady growth would have material adverse consequences for the rest of the world. They emphasized that a combination of currency appreciation and reforms to rebalance the growth model, together, would yield substantial benefits for both China and other countries. Several Directors also noted the potential effects of China’s reserve accumulation and capital account policies on capital flows and global asset prices, although a few others saw no clear evidence that these policies have significant effects on emerging market capital flows.
Directors welcomed China’s generous contributions to low-income countries in both financial and technical assistance.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The
|(Annual percentage change, unless otherwise specified)|
|National accounts and employment|
|Total domestic demand||11.5||12.7||9.7||14.2||10.0||8.5||9.0|
|Net exports 1/||2.0||2.5||0.8||-3.7||0.8||1.5||1.1|
|End of period||2.0||6.6||2.5||0.7||4.7||4.0||3.0|
|Unemployment rate (annual average)||4.1||4.0||4.2||4.3||4.1||4.0||4.0|
|(In percent of GDP)|
|External debt and balance of payments|
|Exports of goods||35.7||34.9||31.7||24.1||26.9||30.2||31.8|
|Imports of goods||27.7||25.9||23.8||19.1||22.6||25.5||26.7|
|Gross external debt||12.5||11.1||8.6||8.6||9.3||10.1||11.5|
|Saving and investment|
|Gross domestic investment||43.0||41.7||44.0||48.2||48.8||48.5||48.5|
|Public sector finance|
|Central government gross debt||16.2||19.6||17.0||17.7||17.0||16.5||15.4|
|General government balance||-0.7||0.9||-0.4||-3.1||-2.2||-1.6||-0.7|
|(Annual percentage change)|
|Real effective exchange rate 2/||1.6||4.0||9.2||3.3||-0.5||…||…|
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.