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IMF Executive Board Concludes 2019 Article IV Consultation with the People’s Republic of China

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with the People’s Republic of China







August 9, 2019















On July 31, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation

[1]


with China.

The Chinese economy is facing external headwinds and an uncertain
environment. GDP growth slowed to 6.6 percent in 2018, driven by necessary
financial regulatory reforms and softening external demand. Growth is
projected to moderate to 6.2 percent in 2019 as the planned policy stimulus
partially offsets the negative impact from the US tariff hike on US$ 200
billion of Chinese exports. Headline inflation rose due to rising food
prices and is expected to remain around 2½ percent.

Reforms progressed in several key areas. The strengthening of financial
regulations and control over off-budget local government investment has
reduced the pace of debt accumulation, helping contain the build-up of
risks in the financial sector. Opening up continued, with decreases in
tariffs, passage of a new foreign investment law, and revisions to the
negative list for foreign investment entry. Progress on SOE reforms,
however, was mixed.

Credit growth slowed through 2018 but began to pick up in 2019. While the
corporate deleveraging partially offset government and household debt
accumulation, total nonfinancial sector debt still rose faster than nominal
GDP growth. The deficit of the general government sector (including
estimated off-budget investment spending) was estimated to be around 11
percent of GDP in 2018.

The current account surplus fell by around 1 percentage point, to 0.4
percent of GDP in 2018 and it is projected to remain contained at 0.5
percent of GDP in 2019. The external position in 2018 was assessed to be
broadly in line with the level consistent with medium-term fundamentals and
desirable policies. Net capital outflows declined sharply from around $650
billion in 2015 and 2016 to $30 billion in 2018.

Executive Board Assessment

[2]

Executive Directors commended the authorities’ recent reform progress, in
particular, in reducing financial sector fragilities and continuing opening
up of the economy. They noted the highly uncertain external environment and
emphasized that successfully shifting from high-speed to high-quality
growth requires continuing with deleveraging and strengthening rebalancing
efforts while adjusting macroeconomic policies to respond to rising trade
tensions.

Directors agreed that the announced policy measures are sufficient to
stabilize growth in 2019 provided there are no further increases in
tariffs, and that additional stimulus and excessive credit growth should be
avoided. In this context, a few Directors reiterated the need to
de-emphasize growth objectives. Directors agreed that if trade tensions
escalate further, putting at risk economic and financial stability,
additional stimulus, mainly fiscal, would be warranted and should be
targeted.

Directors underscored the importance of structural fiscal reforms that can
enhance medium-term growth.

Directors welcomed the authorities’ commitment to multilateralism and a
rules-based trading system. In this regard, they saw scope for China to
work constructively with trading partners to better address shortcomings in
the international trading system. Directors agreed that tensions between
China and the United States should be quickly resolved through a
comprehensive agreement that avoids undermining the international system.
Directors also emphasized that China has an important role to play and
would benefit from further opening up of the economy and other reforms that
enhance competition.

Directors stressed the importance of staying the course on deleveraging and
financial de-risking. They concurred that continuing financial regulatory
reforms while strengthening bank capital, developing a clear resolution
regime for banks, and containing vulnerabilities from rising household debt
would help deliver a more sustainable growth path. To improve credit
allocation, most Directors agreed that a plan to reduce implicit guarantees
for state-owned enterprises would be important.

Directors welcomed the progress on reducing external imbalances over
several years and noted staff’s assessment that the external position in
2018 was broadly in line with fundamentals and desirable policies. They
emphasized that achieving a durable balance in the external position
requires continued progress in addressing distortions that encourage
excessive household savings. In this regard, to help boost consumption and
reduce inequality, Directors urged continued progress on reforms to enhance
the social safety net and make the tax system more progressive. Directors
concurred that greater exchange rate flexibility and deeper and better
functioning FX markets would help the financial system prepare for greater
capital flow volatility. Greater exchange rate policy transparency would
also be important. Some Directors also called for disclosure of FX
interventions. Directors agreed that China should continue to upgrade its
external lending framework to foster greater coordination and cooperation,
and to ensure transparency and debt sustainability.

Directors underscored that a broad set of reforms are needed to boost
productivity and longer-term income convergence. They stressed the need to
increase the role of the market and reduce the dominance of the public
sector in many industries by ensuring fair competition, accelerating
opening up to the private sector, and intensifying reform of state-owned
enterprises. They also highlighted the need to continue to modernize policy
frameworks, including by moving to a more price-based monetary policy
framework, and addressing the misalignment of center-local fiscal
responsibilities. They stressed the urgent need to address China’s
macroeconomic data gaps to further improve data credibility and policy
making.

China: Selected Economic Indicators


2014


2015


2016


2017


2018


2019


2020


2021


2022


2023


2024


Projections


(Annual percentage change, unless otherwise indicated)

NATIONAL ACCOUNTS


Real GDP (base=2015)


7.3


6.9


6.7


6.8


6.6


6.2


6.0


6.0


5.7


5.6


5.5


Total domestic demand


7.2


7.2


7.6


6.3


7.4


6.1


6.2


6.2


6.0


5.8


5.6


Consumption


7.2


8.3


8.6


7.4


9.4


8.0


7.2


6.6


6.3


6.2


6.0


Investment


7.1


6.1


6.5


5.1


4.8


3.8


5.0


5.8


5.6


5.4


5.2


Fixed


6.8


6.7


6.8


4.4


4.8


3.8


5.2


6.0


5.8


5.6


5.4


Inventories (contribution)


0.2


-0.2


0.0


0.4


0.1


0.0


0.0


0.0


0.0


0.0


0.0


Net exports (contribution)


0.4


-0.1


-0.6


0.6


-0.6


0.2


0.0


-0.1


-0.1


-0.1


-0.1


Total capital formation (percent of GDP)


46.8


44.7


44.1


44.6


44.8


42.9


42.2


41.6


41.1


40.5


39.8


Gross national saving (percent of GDP) 1/


49.0


47.5


45.9


46.3


44.6


43.4


42.5


41.8


41.1


40.4


39.7

LABOR MARKET


Unemployment rate (annual average) 2/


5.1


5.1


5.0


4.9


4.8


5.0












Employment


0.4


0.3


0.2


0.0


-0.1


-0.1


-0.1


-0.1


0.1


0.1


0.1

PRICES


Consumer prices (average)


2.0


1.4


2.0


1.6


2.1


2.2


2.4


2.8


2.9


3.0


3.0


GDP Deflator


1.0


1.1


-0.1


2.4


2.1


1.4


1.8


2.1


2.2


2.4


2.3

FINANCIAL


7-day repo rate (percent)


5.1


2.4


2.7


5.4


3.1














10 year government bond rate (percent)


3.7


2.9


3.1


3.9


3.3














Real effective exchange rate (average)


3.2


9.8


-4.9


-2.9


1.4














Nominal effective exchange rate (average)


3.6


9.7


-5.4


-2.5


1.5













MACRO-FINANCIAL


Total social financing 3/


14.3


12.4


16.7


13.4


9.8


10.5


10.5


10.0


9.5


9.2


8.7


In percent of GDP


190


198


216


224


226


232


238


242


245


247


249


Total nonfinancial sector debt 4/


17.1


15.4


19.9


11.0


10.4


11.6


11.7


11.0


10.3


9.9


8.8


In percent of GDP


207


222


249


253


257


266


275


282


288


293


295


Domestic credit to the private sector


13.2


15.8


21.3


8.5


7.8


8.8


9.9


9.5


8.9


8.7


8.1


In percent of GDP


149


159


181


180


178


180


183


185


187


188


188


House price 5/


1.4


9.1


11.3


5.7


12.2


6.5


8.6


7.3


6.6


6.2


6.0


Household disposable income (percent of GDP)


60.4


60.5


61.0


60.4


60.0


60.0


59.8


59.4


58.9


58.1


58.1


Household savings (percent of disposable income)


38.0


37.1


35.5


35.4


33.0


31.5


30.3


28.9


27.3


25.4


25.0


Household debt (percent of GDP)


35.8


38.7


44.8


49.7


54.0


56.2


59.1


61.1


63.2


65.4


67.9


Non-financial corporate domestic debt (percent of GDP)


113


121


136


130


124


124


124


124


124


122


120


BIS credit-to-GDP gap (percent of GDP) 6/


21.1


20.8


18.2


10.5


0.4














GENERAL BUDGETARY GOVERNMENT (Percent of GDP)


Net lending/borrowing 7/


-0.9


-2.8


-3.7


-3.9


-4.8


-6.1


-5.7


-5.6


-5.6


-5.5


-5.4


Revenue


28.1


28.5


28.2


28.3


29.2


28.8


29.1


28.8


28.5


28.2


28.0


Additional financing from land sales


2.7


1.9


2.0


2.6


2.9


2.8


1.7


1.4


1.1


1.0


0.9


Expenditure


31.6


33.2


33.9


34.7


36.9


37.7


36.5


35.7


35.2


34.7


34.3


Debt 8/


38.6


36.4


36.7


36.8


37.9


40.3


43.1


45.5


47.6


49.4


51.0


Structural balance


-0.5


-2.5


-3.6


-3.9


-4.8


-6.1


-5.6


-5.5


-5.5


-5.4


-5.3

BALANCE OF PAYMENTS (Percent of GDP)


Current account balance


2.2


2.7


1.8


1.6


0.4


0.5


0.4


0.2


0.1


0.0


-0.1


Trade balance


4.1


5.1


4.4


3.9


2.9


3.1


2.9


2.7


2.5


2.5


2.4


Services balance


-2.0


-1.9


-2.1


-2.1


-2.2


-2.2


-2.2


-2.2


-2.1


-2.1


-2.1


Net international investment position


15.2


14.9


17.4


17.4


15.9


15.6


14.8


13.9


12.9


12.0


11.0


Gross official reserves (bn US$)


3,899


3,406


3,098


3,236


3,168


3,167


3,174


3,177


3,179


3,182


3,189

MEMORANDUM ITEMS


Nominal GDP (bn RMB) 9/


64,718


69,911


74,563


81,526


88,702


95,539


103,084


111,560


120,546


130,318


140,613


Augmented debt (percent of GDP) 10/


52.3


56.6


62.0


67.3


72.7


80.2


86.2


91.1


95.6


99.3


101.5


Augmented net lending/borrowing (percent of GDP) 10/


-7.2


-8.4


-10.4


-10.8


-11.2


-12.7


-12.2


-11.9


-11.6


-11.5


-11.4


Sources: Bloomberg, CEIC, IMF International Financial
Statistics database, and IMF staff estimates and
projections.


1/ IMF staff estimates for 2017 and 2018.


2/ Surveyed unemployment rate.


3/ Not adjusted for local government debt swap.


4/ Includes government funds.


5/ Average selling prices estimated by IMF staff based on
housing price data (Commodity Building Residential Price)
of 70 large and mid-sized cities published by National
Bureau of Statistics (NBS).


6/ Latest observation is for Q3 2017.


7/ Adjustments are made to the authorities’ fiscal
budgetary balances to reflect consolidated general
budgetary government balance, including government-managed
funds, state-administered SOE funds, adjustment to the
stabilization fund, and social security fund.


8/ Official government debt. Estimates of debt levels
before 2015 include central government debt and explicit
local government debt (identified by MoF and NPC in Sep
2015). The large increase in general government debt in
2014 reflects the authorities’ recognition of the
off-budget local government debt borrowed previously. The
estimation of debt levels after 2015 assumes zero
off-budget borrowing from 2015 to 2021.


9/ Expenditure side nominal GDP.


10/ Augmented fiscal data expand the perimeter of
government to include local government financing vehicles
and other off-budget activity.

 


[1]

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.


[2]

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

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Ting Yan

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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