Abstract
KEY ISSUESContext. After three decades of remarkable growth, the economy has been slowing. Much of theslowdown 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 continuedbuild-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.
1. This statement summarizes data releases since the staff report was finalized. The information does not alter the thrust of the staff appraisal.
2. Real GDP growth was 7.5 percent (y/y) in the second quarter, up slightly from 7.4 percent in Q1 and broadly in line with staff’s forecast. The contribution to growth from net exports turned positive reflecting improving demand from U.S. and European markets. Investment also rose in Q2, from a weak first quarter, similar to the pattern of recent years. Overall, growth in 2014 is on track toward the authorities target of ‘around 7½ percent’, and staff’s growth forecast remains unchanged at 7.4 percent
Contribution to GDP Growth
(In percent, year-on-year)
Citation: IMF Staff Country Reports 2014, 235; 10.5089/9781498308571.002.A003
Sources: CEIC; and IMF staff calculations.China: PMI and GVA
(SA)
Citation: IMF Staff Country Reports 2014, 235; 10.5089/9781498308571.002.A003
Sources: CEIC; Haver Analytics; and IMF staff calculations.3. Many high-frequency indicators point to a pickup in growth momentum in May-June, although the property sector is still facing headwinds. Growth in value added of industry ticked up in June, and that of fixed asset investment stabilized after declining steadily since last year. Retail sales growth held up above 10 percent (y/y) and imports rose by 5½ percent, indicative of stabilizing domestic demand; exports increased by 7 percent, after much weaker figures in early 2014. After decelerating for more than a year, overall credit growth (‘total social financing’) increased in June, reflecting growth in both on-balance sheet bank loans and ‘shadow banking’ activities. Growth in housing starts and sales, however, remained negative, housing prices showed second straight decline for the first time since early 2012, and housing investment growth is down sharply from last year.
Real FAI Growth
(In percent, year-on-year)
Citation: IMF Staff Country Reports 2014, 235; 10.5089/9781498308571.002.A003
Sources: CEIC; and IMF staff calculations.Social Financing Flow
(In RMB trillion)
Citation: IMF Staff Country Reports 2014, 235; 10.5089/9781498308571.002.A003
Sources: CEIC; and IMF staff calculations.4. Consumer price inflation (CPI) moderated to 2.3 percent in June (2.5 percent in May), reflecting slowing food price increases, while nonfood inflation has been stable. Producer prices (PPI) continued to decline, but at a slower pace than before (1.1 percent, from 2.3 percent in March).
