The IMF has slightly raised its forecast for China’s GDP growth for this year to 8.2%, up from the 8.1% it forecast in January, but it has held its forecast for 2013 unchanged at 8.8%. With the IMF’s latest World Economic Outlook expecting the global economy to expand by 3.5% this year and 4.1% next, China’s exporters are seen as benefiting from the pick-up in demand in developed nations. Set against that the slowdown in fixed-asset investment as government measures to cool the property market, and thus new construction, continue to take effect. In addition, domestic demand is not taking off strongly. The IMF says:
The decline in China’s external imbalance has been accompanied by growing tension from internal imbalances—high levels of investment and low consumption—which remain to be addressed. This calls for additional structural reforms and exchange rate adjustment to shift incentives away from investment, particularly in the tradables sector, and toward higher household income and greater consumption.
The IMF also says that, with diminishing inflation pressure, China can afford to hold steady on monetary tightening, although it has to manage lending to overheating sectors such as real estate. As for fiscal policy,
[It] should be the first line of defense against weakening external demand and should foster more consumption–the credit overhang from the 2008–09 stimulus is still working its way through the system, and a renewed lending boom could jeopardize bank loan portfolios. Risks to fiscal balances from energy subsidies should be contained by narrowly targeting subsidies to the most vulnerable households.
Separately, a new IMF working paper, An End To China’s Imbalances? sees China’s current-account surplus falling in the medium term, but warns that that trend masks domestic imbalances as domestic growth relies on high levels of investment rather than an increase in domestic demand and a winding down of domestic savings.
If… ongoing structural reforms are implemented, China has the potential for domestic consumption, rather than investment, to drive future declines in its current account surplus. This would ultimately be a more lasting transformation that would increase the welfare of the Chinese people and contribute significantly to strong, sustained, and balanced global growth.
More grist for the reformers’ mill.