IMF Raises A Virtual Eyebrow To China’s Financial Risks

BENEATH THE BALLYHOO of the US presidential election, the International Monetary Fund wrapped up its Article IV Mission staff visit to China (conducted virtually this time, of course). Its report confirms the IMF’s recent upgraded projections of 1.9% GDP growth this year and 8.2% next with what are now the new-normal caveats.

While the recovery is advancing, growth remains unbalanced as it relies heavily on public support while private consumption is lagging. The outlook faces downside risks, stemming from rising financial vulnerabilities and the increasingly challenging external environment.

The report indicates that moderately expansionary macroeconomic policies in 2021, supported by a shift from public to private demand, will help to balance the recovery better. It would also like to see slightly expansionary fiscal policy with a shift from spending on infrastructure towards strengthening social safety nets and promoting green investment.

It would add further structural reforms to the policy mix, too, including expanded opening up of domestic markets, reform of state-owned enterprises and ensuring competitive neutrality with private firms while promoting green investment and more robust social safety nets.

Nothing there that deviates from the party line of either the IMF or China’s economic policymakers. However, the Fund does seem more exercised about the financial risks than it is wont to display in public.

As the recovery takes hold, exceptional financial support measures to avoid a credit squeeze should be replaced with proactive efforts to address problem loans and strengthen regulatory and supervisory frameworks. A comprehensive bank restructuring framework will lower systemic risks and continue de-risking.

All of which are coming, if in a more piecemeal fashion.

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