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.
On July 25, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the People’s Republic of China.
China’s economy is expected to grow at around 7½ percent this year. Domestic demand has been moderating, reflecting slower investment and rising risks of a deeper adjustment in real estate activity. However, measures taken by the authorities to support growth are expected to bring it in line with the annual target of around 7½ percent. Consumption and the labor market are holding up well, and the global recovery is expected to support activity going forward. Inflation is forecast to remain below 3 percent.
Fiscal policy has been accommodative, with stimulus mainly through off-budget spending at the local-government level. As of end-2013, general government debt is estimated to have risen to close to 40 percent of GDP. Although credit growth is still rapid, it has decelerated considerably. Growth in total social financing—a broad measure of funding to the private sector—decelerated from 22 percent in May 2013 to 16 percent in May 2014. This coincided with a series of steps to strengthen regulation and supervision—especially relating to shadow banking—and a rise in interbank interest rates in the second half of last year, although much of it was subsequently unwound earlier this year.
External imbalances have fallen, with the current account surplus declining to 1.9 percent of GDP last year. The adjustment reflects the past Real Effective Exchange Rate (REER) appreciation, weak global demand, worsening of terms of trade, and strong domestic investment. On domestic rebalancing, while investment was the largest contributor to growth in 2013, consumption growth has been robust, urban household income has been growing faster than GDP, and the share of services in output and employment has been rising.
Executive Board Assessment2
Executive Directors noted that heavy reliance on capital spending and credit has sustained rapid growth, helped reduce external imbalances, and provided a welcome lift to the global economy. However, declining efficiency of investment, a significant buildup of debt, income inequality and environmental costs are threatening growth prospects. The challenge is to shift gears, reduce the vulnerabilities that have built up, and transition to a more sustainable growth path. In this regard, Directors welcomed China’s Third-Plenum reform blueprint and agreed that the implementation of these reforms will help China achieve more balanced and inclusive growth.
Directors underscored the importance of strengthening the financial sector to safeguard stability and improve the allocation of credit. Key reforms include further strengthening regulation and supervision, freeing up bank deposit interest rates, increasing reliance on interest rates as an instrument of monetary policy, and eliminating implicit guarantees across the financial and corporate landscape. Directors also emphasized the need to reform state-owned enterprises with the aim of leveling the playing field between the private and public sectors. This can be achieved by opening up more sectors—particularly services—to competition, improving resource allocation and financing, increasing dividend payments to the budget, and hardening budget constraints.
Directors agreed that fiscal and social security reforms are needed to strengthen public finances, boost consumption, and foster more inclusive growth. Key reforms include reordering local government finances by better aligning local revenues with expenditure responsibilities and strengthening the management of local government borrowing; reducing social security contributions; and continuing to improve pension and health benefits. To ensure the sustainability of public finances, this should be combined with reforms to the social security system, shifting the legacy and welfare parts of pensions to the budget, improvements in the tax system, and cuts to lower-priority spending.
Directors considered that demand management should focus on reducing vulnerabilities while preventing growth from slowing too much. In particular, cutting off-budget spending, further reining in credit expansion, and containing investment growth would help mitigate risks, but would also affect growth. Nevertheless, Directors agreed that vulnerabilities have risen to the point that containing them is a priority and broad-based stimulus should only be deployed if growth risks slowing significantly below the authorities’ target. If such stimulus becomes necessary, it should be applied through fiscal policy, on-budget, with measures aimed at protecting the vulnerable and advancing reforms. Regarding the growth target for 2015, while most Directors concurred that a range of 6½ to 7 percent would be consistent with the goal of transitioning to a safer and more sustainable growth path, a few other Directors considered a lower target more appropriate.
Taking note of the staff’s assessment that the renminbi remains moderately undervalued, Directors agreed that a successful implementation of the reform blueprint will support continued domestic and external rebalancing. Directors supported the authorities’ policy of moving toward a more flexible, market-determined exchange rate, with no sustained, large, and asymmetric intervention, which will allow greater degrees of freedom to monetary policy.
Directors welcomed the authorities’ efforts to enhance data quality and encouraged them to make further progress in this area, including by subscribing to the Special Data Dissemination Standard (SDDS).
China: Selected Economic Indicators
Contribution to annual growth in percent.
Expenditure-based nominal GDP is used throughout in calculations of shares.
Staff estimates based on the National Audit Office definition of government debt, excluding central government debt issued by China Railway Corporation.
Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general government balance, including government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.
China: Selected Economic Indicators
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Projection | |||||||||||
| (In percent, year-on-year growth, unless otherwise noted) | |||||||||||
| National accounts and employment | |||||||||||
| Real GDP | 9.2 | 10.4 | 9.3 | 7.7 | 7.7 | 7.4 | 7.1 | ||||
| Total domestic demand | 13.9 | 10.5 | 10.2 | 8.2 | 8.3 | 7.6 | 7.0 | ||||
| Consumption | 9.4 | 9.2 | 10.9 | 8.6 | 7.9 | 7.5 | 7.1 | ||||
| Investment | 19.2 | 12.0 | 9.5 | 7.7 | 8.8 | 7.7 | 6.9 | ||||
| Fixed | 22.6 | 11.5 | 9.1 | 9.1 | 9.2 | 8.1 | 7.2 | ||||
| Inventories 1/ | −0.7 | 0.5 | 0.4 | −0.4 | 0.0 | 0.0 | 0.0 | ||||
| Net exports 1/ | −3.4 | 0.4 | −0.4 | −0.2 | −0.3 | 0.0 | 0.3 | ||||
| Consumer prices | |||||||||||
| End of period | 1.9 | 4.6 | 4.1 | 2.5 | 2.5 | 1.9 | 2.5 | ||||
| Average | −0.7 | 3.3 | 5.4 | 2.6 | 2.6 | 2.0 | 2.5 | ||||
| Unemployment rate (annual average) | 4.3 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | ||||
| (In percent of GDP) 2/ | |||||||||||
| External debt and balance of payments | |||||||||||
| Current account | 4.8 | 4.0 | 1.9 | 2.6 | 1.9 | 1.8 | 2.0 | ||||
| Trade balance | 4.9 | 4.3 | 3.3 | 3.8 | 3.8 | 3.8 | 3.9 | ||||
| Exports of goods | 23.6 | 26.6 | 26.0 | 24.5 | 23.4 | 22.7 | 22.1 | ||||
| Imports of goods | 18.7 | 22.3 | 22.7 | 20.7 | 19.6 | 18.8 | 18.1 | ||||
| Gross external debt | 8.4 | 9.2 | 9.5 | 8.8 | 9.1 | 9.7 | 10.2 | ||||
| Saving and investment | |||||||||||
| Gross domestic investment | 47.2 | 48.1 | 48.3 | 47.7 | 47.8 | 47.7 | 47.4 | ||||
| National saving | 51.9 | 52.1 | 50.2 | 50.3 | 49.7 | 49.5 | 49.4 | ||||
| Public sector finance | |||||||||||
| General government debt 3/ | 35.8 | 36.6 | 36.5 | 37.4 | 39.4 | 40.8 | 41.9 | ||||
| General government net lending/borrowing 4/ | −1.8 | −1.2 | 0.6 | 0.2 | −0.9 | −1.0 | −0.8 | ||||
| (In percent, year-on-year growth) | |||||||||||
| Real effective exchange rate | |||||||||||
| Annual average | 3.4 | −0.4 | 2.7 | 5.2 | 6.2 | … | … | ||||
| End of period | −5.0 | 5.3 | 5.9 | 0.7 | 8.2 | … | … | ||||
Contribution to annual growth in percent.
Expenditure-based nominal GDP is used throughout in calculations of shares.
Staff estimates based on the National Audit Office definition of government debt, excluding central government debt issued by China Railway Corporation.
Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general government balance, including government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.
China: Selected Economic Indicators
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Projection | |||||||||||
| (In percent, year-on-year growth, unless otherwise noted) | |||||||||||
| National accounts and employment | |||||||||||
| Real GDP | 9.2 | 10.4 | 9.3 | 7.7 | 7.7 | 7.4 | 7.1 | ||||
| Total domestic demand | 13.9 | 10.5 | 10.2 | 8.2 | 8.3 | 7.6 | 7.0 | ||||
| Consumption | 9.4 | 9.2 | 10.9 | 8.6 | 7.9 | 7.5 | 7.1 | ||||
| Investment | 19.2 | 12.0 | 9.5 | 7.7 | 8.8 | 7.7 | 6.9 | ||||
| Fixed | 22.6 | 11.5 | 9.1 | 9.1 | 9.2 | 8.1 | 7.2 | ||||
| Inventories 1/ | −0.7 | 0.5 | 0.4 | −0.4 | 0.0 | 0.0 | 0.0 | ||||
| Net exports 1/ | −3.4 | 0.4 | −0.4 | −0.2 | −0.3 | 0.0 | 0.3 | ||||
| Consumer prices | |||||||||||
| End of period | 1.9 | 4.6 | 4.1 | 2.5 | 2.5 | 1.9 | 2.5 | ||||
| Average | −0.7 | 3.3 | 5.4 | 2.6 | 2.6 | 2.0 | 2.5 | ||||
| Unemployment rate (annual average) | 4.3 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | ||||
| (In percent of GDP) 2/ | |||||||||||
| External debt and balance of payments | |||||||||||
| Current account | 4.8 | 4.0 | 1.9 | 2.6 | 1.9 | 1.8 | 2.0 | ||||
| Trade balance | 4.9 | 4.3 | 3.3 | 3.8 | 3.8 | 3.8 | 3.9 | ||||
| Exports of goods | 23.6 | 26.6 | 26.0 | 24.5 | 23.4 | 22.7 | 22.1 | ||||
| Imports of goods | 18.7 | 22.3 | 22.7 | 20.7 | 19.6 | 18.8 | 18.1 | ||||
| Gross external debt | 8.4 | 9.2 | 9.5 | 8.8 | 9.1 | 9.7 | 10.2 | ||||
| Saving and investment | |||||||||||
| Gross domestic investment | 47.2 | 48.1 | 48.3 | 47.7 | 47.8 | 47.7 | 47.4 | ||||
| National saving | 51.9 | 52.1 | 50.2 | 50.3 | 49.7 | 49.5 | 49.4 | ||||
| Public sector finance | |||||||||||
| General government debt 3/ | 35.8 | 36.6 | 36.5 | 37.4 | 39.4 | 40.8 | 41.9 | ||||
| General government net lending/borrowing 4/ | −1.8 | −1.2 | 0.6 | 0.2 | −0.9 | −1.0 | −0.8 | ||||
| (In percent, year-on-year growth) | |||||||||||
| Real effective exchange rate | |||||||||||
| Annual average | 3.4 | −0.4 | 2.7 | 5.2 | 6.2 | … | … | ||||
| End of period | −5.0 | 5.3 | 5.9 | 0.7 | 8.2 | … | … | ||||
Contribution to annual growth in percent.
Expenditure-based nominal GDP is used throughout in calculations of shares.
Staff estimates based on the National Audit Office definition of government debt, excluding central government debt issued by China Railway Corporation.
Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general government balance, including government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.
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.