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© 2004 International Monetary Fund

November 2004

IMF Country Report No. 04/351

People’s Republic of China: 2004 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2004 Article IV consultation with the People’s Republic of China, the following documents have been released and are included in this package:

  • the staff report for the 2004 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on May 25, 2004, with the officials of the People’s Republic of China on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 6, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of July 28, 2004 updating information on recent developments.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 28, 2004 discussion of the staff report that concluded the Article IV consultation.

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

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Staff Report for the 2004 Article IV Consultation

Prepared by the Staff Representatives for The 2004 Article IV Consultation with the People’s Republic of China

Approved by David Burton and Anthony R. Boote

July 6, 2004

  • The 2004 Article IV consultation discussions were held in Beijing during May 17-25, 2004.

  • The staff team comprised Mr. Dunaway (Head), Messrs. Prasad, Rumbaugh, and Feyzioglu and Ms. Wang (all APD), Ms. Fedelino (FAD), Ms. Baldwin (MFD), and Ms. Baker (PDR). The team was assisted by Mr. Brooks (Senior Resident Representative) and Mr. Barnett (Resident Representative). Messrs. Wang, Ge, and Zheng (OED) participated in the discussions. Mr. Kato and Mr. Nolan joined the mission on May 20-21 and Mr. Burton during May 17-20.

  • China has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement. Exchange controls continue to apply to most financial account transactions.

  • While progress continues to be made in upgrading China’s economic statistics, weaknesses remain in key areas. These include the national accounts, fiscal and labor statistics, and the international investment position. The authorities are making improvements in all of these areas. China has subscribed to the GDDS, with its metadata posted on the official website (Dissemination Standards Bulletin Board) since April 2002.

  • At the time of circulation, the Chinese authorities have not indicated whether or not they consent to the publication of the paper.

  • The last Article IV consultation was concluded on October 31, 2003.

Table of Contents

  • Executive Summary

  • I. Recent Economic Developments and Outlook

    • A. Introduction

    • B. Economic Developments

    • C. Macroeconomic Outlook and Risks

  • II. Policy Discussions

    • A. Monetary and Exchange Rate Policy

    • B. Fiscal Policy

    • C. Structural Reforms

  • III. Staff Appraisal

  • Boxes

  • 1. Lessons from Earlier Economic Cycles

  • 2. Regional Impact of a Slowdown in China

  • 3. Exchange Rate Flexibility and Capital Account Liberalization in China

  • 4. Reform of the Banking System

  • Figures

  • 1. Growth and Demand Indicators

  • 2. External Indicators

  • 3. Macroeconomic Policies

  • Tables

  • 1. Summary Indicators

  • 2. Balance of Payments

  • 3. External Debt

  • 4. Indicators of External Vulnerability

  • 5. Monetary Developments

  • 6. State Budgetary Operations

  • 7. Official and IMF Budget Definitions

  • 8. Medium-Term Scenario

  • Annexes

  • I. Fund Relations

  • II. Debt Sustainability Analysis

  • III. China’s Fiscal Reforms and Technical Assistance

  • IV. Statistical Issues

  • V. Relations with the World Bank

  • VI. Relations with the Asian Development Bank

  • VII. Millenium Development Goals

Executive Summary

Economic Setting:

The pace of economic activity increased considerably in 2003, despite the SARS outbreak. GDP grew at an annual rate of 10 percent in the fourth quarter of 2003 and continued roughly at that rate in the first quarter of 2004, led primarily by high levels of investment. CPI inflation picked up to 4.4 percent in May.

In response to overinvestment in several sectors and signs of potential overheating, economic policies were tightened in several stages beginning in mid-2003 through a series of monetary and administrative measures. While money and credit growth rates have slowed, they still remain high at 18-19 percent (y/y) as of May 2004.

Policy Discussions:

Staff believes that a further tightening in monetary conditions is likely to be needed. The authorities recognize that additional steps could be required, but prefer to give the measures taken so far more time to work. Local government-sponsored projects have been a major source of the surge in investment, and the central government has taken administrative measures to exert greater control and help achieve a “soft landing.”

Large capital inflows continue to complicate the conduct of monetary policy. Greater exchange rate flexibility would enhance China’s ability to pursue an independent monetary policy, as well as to adjust to economic shocks and major structural changes. The authorities agree in principle on the need for greater exchange rate flexibility, but are concerned about the impact of a potential appreciation of the renminbi on the domestic economy, particularly with respect to employment growth.

Fiscal policy has an important role to play in cooling down the economy. The authorities plan to use part of a likely revenue overperformance which is retained by the central government to settle outstanding VAT refunds and are considering reductions in spending, particularly for public investment.

Fundamental fiscal reforms with respect to taxation and expenditure management are moving forward. However, to improve the effectiveness of fiscal management, the introduction of a new budget classification system, together with changes in the chart of accounts, in time for the 2006 budget needs to be expedited.

Progress continues to be made on banking sector reforms. Restructuring plans are being put in place for the two state banks that were recently recapitalized. The staff cautioned that problems in the rest of the banking system should also be addressed expeditiously. The recent rapid credit growth threatens to reverse the progress made in reducing non-performing loans, adding to the urgency of tightening credit policy.

Continued implementation of reforms in other areas will be necessary to address macroeconomic and structural vulnerabilities and support sustainable growth. These include SOE reform, implementation of WTO commitments, development of labor and capital markets, and improvements in economic statistics.

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July 28, 2004

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Public Information Notice (PIN) No. 04/99


August 25, 2004

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