THE INTERNATIONAL MONETARY FUND’S most recent annual checkup on the health of China’s economy — more formerly the IMF staff’s 2021 Article IV Mission — carries few surprises.
The summary of the IMF team’s report says China’s recovery is well-advanced but unbalanced.
It also notes that the recovery is slowing because of the rapid withdrawal of policy support and the lagging recovery in consumption amid recurrent COVID-19 outbreaks, with more contagious variants posing challenges.
Recent power outages and a slowdown in real estate investment related to the ongoing policy effort to reduce leverage in the property sector are also weighing on growth. Regulatory tightening targeting technology sectors, while aimed at strengthening competition and data governance, has increased policy uncertainty.
In its October World Economic Outlook, the IMF forecast GDP growth of 8.0% for this year and 5.6% next.
At the same time, the downside risks are accumulating.
Short-term risks include continued pandemic uncertainty, consumption weakness, and elevated financial vulnerabilities. Declining productivity growth, increased decoupling pressures, and a shrinking workforce pose longer-term headwinds to growth.
The prescription will be familiar, too: reduce financial vulnerabilities to protect the recovery; and reaccelerate structural reforms to raise productivity and sustain high-quality long-term growth that is ‘balanced, inclusive and green’.
The Fund also wants to see supportive macroeconomic policies. It recommends that fiscal policy, which has been contractionary this year, should temporarily shift to a neutral stance and focus on strengthening social protection (a long-standing call on the IMF’s part) and promoting green investment over traditional infrastructure spending.
Given subdued core consumer price inflation and still significant economic slack, the Fund also wants monetary policy to be accommodative.
The passage on financial risks also has a familiar ring, even if those are now more urgent:
To safeguard stability, financial risks need to be addressed in a clear and coordinated fashion. Ongoing efforts to address high corporate leverage and phase out implicit guarantees for state-owned enterprises through regulatory strengthening should be accompanied by establishing market-based insolvency and resolution frameworks to safeguard financial stability and facilitate efficient credit reallocation and increase productivity. A comprehensive bank restructuring approach is needed to strengthen the banking system and improve its capacity to support the recovery.
Simultaneous implementation of additional key reforms—including a further opening up of domestic markets, reforming state-owned enterprises, and ensuring competitive neutrality with private firms while promoting green investment and strengthening social protection—will support the transition to high-quality growth.
The report also ties efforts on climate mitigation to economic rebalancing. It says that achieving the 2030 peak carbon and 2060 carbon neutrality goals will be most successful if China combines economic rebalancing towards a more consumption-based growth model with the use of carbon pricing tools, such as an improved national emissions trading scheme.
It also calls on Beijing to green the Belt and Road Initiative and aid the efforts to put low-income countries’ debt on a sustainable footing, including the timely implementation of the G20 Common Framework for debt treatment by all relevant Chinese entities. That is stronger wording on the debt point than in the 2020 Article IV Mission report, almost a rebuke by the standards of these reports.