IMF Calls for China to Gradually Wind Down Economic Stimulus

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The International Monetary Fund has lifted its growth forecasts for the Asia-Pacific region, as well as called upon China to gradually withdraw from loose monetary and fiscal policy given opportune economic conditions.

In its latest regional report released on 13 October the IMF’s Asia and Pacific Department forecasts economic growth in the Asia-Pacific of 5.6% and 5.5% in 2017 and 2018 respectively, for upward adjustments of 0.1 percentage points compared to April projections.

Since April the IMF has also upgraded its 2017 GDP forecast for China by 0.2 percentage points to 6.8%, as well as average growth over the next three years by 0.3 percentage points to 6.3%.

The IMF forecast for China’s 2017 inflation has been reduced to 1.8%, while it is expected to gradually rise to 2.6% over the medium-term.

Changyong Rhee, Director of the IMF’s Asia and Pacific Department, warned that the Asia-Pacific’s current economic health may not be sustainable, and that tightening of international financial conditions as well as regional political risk could lead to a slight easing of growth in the near future.

In the medium term, Rhee warned of the challenges created by high leverage levels the region’s ageing demographics.

For this reason Rhee called for Asian nations uses the opportune economic conditions at the present to pursue much needed reforms.

With respect to China Rhee pointed to the risk created by rapid growth in debt levels, and called for counter-cyclical macro-prudential measures to be the focal point of policies, as well as a gradually withdrawn with loose monetary policy.

Because China’s domestic resource mobilisation rate is very high, the IMF believes that the Chinese economy is seeing rapid growth beyond sustainable levels, and considers a gradual withdrawal of stimulus policies to be of benefit to fiscal sustainability.

The IMF also said that fiscal policy should only be used to support structural reforms that have market mechanisms at their core.

Markus Rodlauer, Deputy Director, Mission Chief China, IMF, said to Caixin that in recent years China’s fiscal deficit had seen rapid growth, and according to IMF calculations it may have reached around 12% of GDP.

For this reason in the medium term fiscal policy should shift from government-funded investment to an emphasis upon support for economic rebalancing, in order to improve the social welfare system as well as advance the transition to a consumption-driven economic growth model.

The IMF also emphasised the need for reform of China’s state-owned enterprises to forestall risk and improve economic efficiency.

IMF president Christine Lagard said at a press conference that the two critical areas for Chinese policy at present are reform of SOE’s and reduction of debt ratios.

According to the IMF’s latest Asia-Pacific report China’s removal of covert support for SOE’s would serve as a major step for enabling market forces to play a greater role in the economy.

 

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