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IMF Country Report No. 14/235
July 2014
PEOPLE’S REPUBLIC OF CHINA
2014 ARTICLE IV CONSULTATION—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE PEOPLE’S REPUBLIC OF CHINA
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 2014 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 prepared by a staff team of the IMF for the Executive Board’s consideration on July 25, 2014, following discussions that ended on June 5, 2014, 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 8, 2014.
An Informational Annex prepared by the IMF.
A Staff Statement of July 25, 2014 updating information on recent developments.
A Press Release summarizing the views of the Executive Board as expressed during its July 25, 2014 consideration of the staff report that concluded the Article IV consultation with the People’s Republic of China.
A Statement by the Executive Director for the People’s Republic of China.
The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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©2014 International Monetary Fund
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PEOPLE’S REPUBLIC OF CHINA
STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION
July 8, 2014
Key Issues
Context. After three decades of remarkable growth, the economy has been slowing. Much of the slowdown has been structural, reflecting the natural convergence process and waning dividends from past reforms; weak global growth has also contributed. Moreover, since the global financial crisis, growth has relied too much on investment and credit, which is not sustainable and has created rising vulnerabilities. Growth was 7.7 percent in 2013, and is expected to slow to around 7½ percent this year and decline further over the medium term.
Focus. The pattern of growth since the global financial crisis is not sustainable and has resulted in rising vulnerabilities. The discussions focused on assessing the risks posed by the continued build-up of vulnerabilities; reforms to unleash new, sustainable engines of growth and reduce vulnerabilities; and how to best manage aggregate demand in this context, as growth is slowing yet risks are still rising. A key takeaway is that to secure a safer development path, accommodative policies need to be carefully unwound, accompanied by decisive implementation of the announced reform agenda to promote rebalancing. The result will be somewhat slower but safer growth in the near term, with the significant long-run benefit of securing more inclusive, environment-friendly, and sustainable growth.
Risks. Credit and ‘shadow banking,’ local government finances, and the corporate sector—particularly real estate—are the key, and interlinked, areas of rising vulnerability. In the near term, the risk of a hard landing is still considered low as the government has the capacity to combat potential shocks. However, without a change in the pattern of growth, the hard-landing risk continues to rise and is assessed to be medium-likely over the medium term.
Reform agenda. The authorities have announced a comprehensive and ambitious blueprint of reforms. Successful implementation should achieve the desired transformation of the economy, but will also be challenging.
Demand management. Reining in credit growth, local government borrowing, and investment will address the risks, but also slow growth. Macro support should be calibrated to allow needed adjustments to take place, while preventing growth from slowing too much.
Scenarios and spillovers. With faster adjustment and reform implementation, growth will be somewhat lower in the near term, with moderate spillovers for trading partners. However, in the medium term, income and consumption will both be higher—a result that is good for China and good for the global economy.
Approved By
Markus Rodlauer and Kalpana Kochhar
Discussions took place in Beijing, Shanghai, and Shenyang during May 22–June 5, 2014. The staff team comprised Markus Rodlauer (head), Steven Barnett, Mali Chivakul, Waikei Lam, Wei Liao, Wojciech Maliszewski (all APD), Philippe Wingender (FAD), Xiaoyong Wu (MCM), and Alfred Schipke, Murtaza Syed, and Shaun Roache (MCM) (Resident Representatives). Mr. Lipton (First Deputy Managing Director) joined the concluding meetings.
Contents
SETTING
A. Background
B. Developments and Outlook
RISKS AND BUFFERS
A. Domestic Vulnerabilities
B. Domestic Risk Assessment
C. External Risks
SUSTAINING GROWTH AND MANAGING RISKS
A. Transition to a New Growth Model
B. Addressing Vulnerabilities and Managing Demand
SCENARIOS AND SPILLOVERS
STAFF APPRAISAL
A. Revised Estimate on Augmented Balance and Debt
B. LGFVs: Government Units or Nonfinancial Public Corporations?
C. Technical Details on Augmented Estimates:
BOXES
1. Real Estate: Impact of a Market Correction
2. Corporate Leverage in China
3. Local Government Finances
4. Rapid Growth in Shadow Banking and Internet Finance
5. International Perspective on China’s Credit Boom
6. Fiscal Options: Reducing the Deficit and Promoting Inclusive Growth
7. Fiscal Policy for Greener Growth
8. RMB Internationalization
9. External Assessment
10. Potential Growth and Output Gap
11. Giving Credit for China’s Slowdown—The Third-Plenum Reform Blueprint
FIGURES
1. Growth and Inflation
2. Financial Sector Development
3. Rebalancing
4. Balance of Payments
5. Banking Sector
TABLES
1. Selected Economic Indicators
2. Balance of Payments
3. Indicators of External Vulnerability
4. Monetary Developments
5. General Government Fiscal Data
6. Illustrative Medium-Term Scenario
APPENDICES
I. Summary of Staff Recommendations and Announced Reform Initiatives Following the Third Plenum
II. Progress on Key Recommendations of the FSAP, 2013–2014
III. Augmented Fiscal Data
IV. Risk Assessment Matrix
V. Debt Sustainability Analysis
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PEOPLE’S REPUBLIC OF CHINA
STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
July 8, 2014
Prepared By
The Asia and Pacific Department
(In consultation with other departments)
Contents
FUND RELATIONS
WORLD BANK-IMF COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
TECHNICAL ASSISTANCE
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Press Release No. 14/369
FOR IMMEDIATE RELEASE
July 30, 2014
International Monetary Fund
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Washington, D. C. 20431 USA
