IN ITS LATEST World Economic Outlook, the International Monetary Fund has left its forecast for China’s growth this year and next unchanged from January’s 6.6% and 6.4% respectively.
Faster than expected global growth and domestic policy support has sustained the economy in the form of resurgent net exports and healthy private consumption, giving it some momentum to propel it into the challenging headwinds of America First protectionism and still-risky domestic overleverage.
Thereafter, the IMF provides a familiar refrain:
Over the medium term, the economy is projected to continue rebalancing away from investment toward private consumption and from industry to services, but nonfinancial debt is expected to continue rising as a share of GDP, and the accumulation of vulnerabilities clouds the medium-term outlook.
And its obligatory silver lining:
Tighter regulation of nonbank intermediation in China, where nonfinancial corporate sector debt is still rising, is a welcome start of a needed policy response to contain the accumulation of vulnerabilities.
But it also highlights a missed opportunity:
Fiscal policy has played a vital part in shoring up short-term growth at the expense of eroding valuable policy space. Gradual consolidation, together with a shift of spending back onto the budget and away from off-budget channels, would help improve sustainability.
The Fund’s accompanying Global Financial Stability Report goes into greater depth about the elevated risks posed by what it says is the large-scale, tight and opaque linking of the banking system to the shadow banking sector (see diagram below) through its exposure to off-balance-sheet investment vehicles largely funded through the issuance of some 75 trillion yuan ($12 trillion) of investment products.
One-third of those by value are directly managed by the banks, who are seen as implicitly guaranteeing the products. A key challenge for authorities will be phasing out those implicit guarantees, which will require banks to improve their liquidity and capital buffers as there are large maturity mismatches between the products’ assets and liabilities.