The IMF has trimmed its January forecasts for China’s GDP growth this year and next. Its new projection for 2013 is cut by one-tenth of a percentage point to 8% and that for 2014 by three-tenths of a percentage point to 8.2%. In a passage likely written before the release of the first-quarter GDP figures, it says that growth has already returned “to a healthy pace” in China. The slight acceleration in GDP growth that it says will be seen this year from last year’s 7.8% reflects continued robust domestic demand in both consumption and investment and renewed external demand. Inflation will pick up only modestly to an average of 3% in 2013, the Fund says.
Nothing terribly surprising in all that. Nor in the Fund’s warning that the potential impact of external risks on China and the other Asian economies remains “considerable”. An implosion of the euro debt crisis and a stalling of the U.S.’s tepid recovery because of fiscal contraction remain the most threatening. As those risks recede, regional challenges will come into sharper focus as financial imbalances and asset prices are building.
A credit bubble is perhaps most threatening to China, where half of financial intermediation now takes pale outside the traditional banking system, the IMF notes. It calls for financial-sector reform to be accelerated to contain risks related to the rapid growth in total credit and to prevent a further buildup of excess capacity. It welcomes the China Banking Regulatory Commission’s recent steps to strengthen the supervision of banks’ off-balance-sheet activities.
The IMF also sees risks in the disruption of the region’s increasingly integrated supply chains and interconnected demand and finance. It lists three potential sources: territorial disputes getting out of hand; Abenomics going pear-shaped; and domestic reform stalling. To our eye, that reads like a list in ascending order of likelihood.