A NEWLY PUBLISHED IMF Working Paper takes the measure of Beijing’s progress in rebalancing the economy away from investment and export-driven growth to high-value-add innovation-led industry and domestic consumption.
In summary, the paper says:
External rebalancing has advanced well, while progress on internal rebalancing has been mixed, with substantial progress on the supply side, moderate progress on the demand side, and limited progress on the credit side. Rebalancing on income equality and environment has also been mixed, with the energy intensity of growth falling and labor’s share of income rising, but income inequality and local air pollution remaining very high.
The author of the paper has also created a visual traffic-lights type scorecard, with data going back to 2010 and forecast out to 2021.
We have taken the liberty of taking a snapshot of where we are now based on 2015 or most recent available data (see Table 1, left).
The IMF has long been cheerily upbeat about the prospects for China’s economic development — no dramatic headlines generated by dire warnings of the rising risks of a banking crisis, as came from the Bank for International Settlements in its latest quarterly review published this week.
While the paper does acknowledge in this regard that the risk of “a disruptive adjustment” will increase significantly in the medium term, it also says that buffers such as foreign-exchange reserves are still large and able to help absorb potential financial shocks, although they will likely diminish over time, especially if reforms lag.
The paper also notes that demographic and structural changes will provide tailwinds to China’s rebalancing. It is certainly true that the rapid ageing China will experience over the next 15 years will turn the demographic dividend that has helped power growth for the past three decades into a demographic deficit.
The paper underlines that “successful rebalancing requires coordinated progress on various fronts. Going too fast on one area, while too slow on others, may derail the whole process.”
That is also not to say that significant policy efforts are not needed to get there.
Specific recommendations include:
- continuing to move to an effectively floating exchange rate regime to prevent future foreign-exchange misalignments;
- raising government health care spending to encourage a lowering of the savings rate (always a treat to see the austere IMF urging a communist country to increase state spending);
- deregulating services to drive service sector productivity to offset the impact of labour being re-allocated away from the high-productivity industrial sector. This also comes with a warning of the dangers of deindustralising too early and too fast;
- pushing ahead with the glacial pace of reform of state-owned enterprises to improve the efficiency of credit allocation. Currently, 40% of industrial assets are managed by SOEs, with asset returns some 7 percentage points lower than their private counterparts, the paper notes; and
- improving the redistributive role of fiscal policy through a more progressive tax structure, increased transfers and strengthened social safety net.
No surprises in that list. All the prescriptions are out of the IMF’s policy toolkit for China that the Fund has been using to cajole for reform.