IMF Says China’s Slowdown On Track But Speed Up SOE Reform

THE INTERNATIONAL MONETARY FUND can usually be relied upon for a supportive word for China’s economic reforms. The heaviest punch aimed by Beijing in its report on the prospects and challenges for the global economy produced for the G-20 meetings in Shanghai at the end of this week is to criticize the slow pace of reform of state owned enterprises (SOEs).

The Fund’s staff would have likely known of the SOE reforms just announced. The State-owned Assets Supervision and Administration Commission said pilot projects for ten ownership, management and governance reforms would be introduced this year, along with further plans to merge and restructure large SOEs.

China Chengtong Holdings, an asset management company, and China Reform Holdings, an investment firm charged with revamping state-owned enterprises, have reportedly been nominated to kick off the pilots, a pair that makes it look as if state-driven industry consolidations to reduce industrial overcapacity are the priority.

With seeming knowledge aforethought, the Fund said:

The reform strategy for state-owned enterprises needs to be more ambitious and its implementation accelerated. While this reform aims at modernizing corporate governance, it continues to emphasize the strategic role of the state while providing no clear road map to a substantially greater role for the private sector and to imposing hard budget constraints.

Otherwise, the IMF report was typically tempered in its observations that China’s slowing growth is a main headwind for the global economy and will continue to be so, but the slowdown is part of a rebalancing of the domestic economy that will be good for global growth in the long term.

Growth in China is expected to slow as imbalances in real estate, credit, and investment continue to unwind and the economy rebalances towards consumption and services.

This process is on track, the Fund says, though there are risks and will be spillovers.

While the transition is proceeding broadly as expected, it is still fraught with uncertainty and likely to entail significant spillovers through trade and commodities, which could be amplified by financial channels. Economies most exposed to these spillovers are commodity exporters, those within the Asian supply chain, and machinery exporters.

The Fund continues to forecast 6.3% GDP growth for China this year and 6.0% in 2017, both down from last year’s 6.9%.

Wary of currency wars, the Fund also calls for clearer delineation of Beijing’s policy towards the value of the yuan.

In China, the challenge is to achieve a transition to a more balanced growth model while reducing vulnerabilities from excess leverage and strengthening the role of market forces, including in the foreign exchange market. The authorities should ensure clear communication of their exchange rate policies and be willing to accept the moderately lower growth consistent with rebalancing. In other words, the quality of growth matters, not just the quantity. If growth risks slipping significantly below a prudent range, the first line of defense should be on-budget fiscal stimulus that supports the rebalancing process. Although the transition process is likely to entail foreign significant spillovers through trade and commodities, possibly amplified by financial channels, a well-managed rebalancing of China’s growth model would benefit global growth down the road and reduce tail risks. The international community should support China’s efforts to reform and rebalance its economy.

The concern about the absence of market forces echoes the Fund’s criticism of the slow pace of state-owned enterprise reform, which it contrasts with the progress made on financial liberalization and in laying the foundations for stronger local government finances.