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IMF Cuts Its China Growth Forecasts Sharply

Screenshot of cover of IMF' July 2022 update to its World Economic Outlook

THE INTERNATIONAL MONETARY FUND has sharply cut its forecast for China’s growth this year and next as part of a gloomy mid-year update to its World Economic Outlook.

The Fund is now expecting China’s economy to grow 3.3% this year and 4.6% next, which is 1.1 percentage points and half a percentage point lower, respectively, from its April forecast.

The IMF cites the lockdowns to contain Covid-19 and the deepening real estate crisis, causing a sharper-than-expected slow down in the first half of the year, as the reasons it lowered its forecast. It warns that both could worsen, further reducing growth, while geopolitical fragmentation could impede global trade and cooperation.

The slowdown has already added to global supply chain disruptions.

COVID-19 outbreaks and mobility restrictions as part of the authorities’ zero-COVID strategy have disrupted economic activity widely and severely. Shanghai, a major global supply chain hub, entered a strict lockdown in April 2022, forcing citywide economic activity to halt for about eight weeks. In the second quarter, real GDP contracted significantly by 2.6 percent on a sequential basis, driven by lower consumption—the sharpest decline since the first quarter of 2020, at the onset of the pandemic, when it declined by 10.3 percent. Since then, more contagious variants have driven a worrisome surge in COVID-19 cases. The worsening crisis in China’s property sector is also dragging down sales and real estate investment. The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.

Chart showing impact of Covid-19 outbreaks in China on global supply chains. Source: IMF July 2022 update to World Economic Outlook

Growth of 3.3% would be China’s slowest growth in four decades, excluding the initial COVID-19 crisis in 2020. The official target of above 5% growth seems increasingly out of reach regardless of the infrastructure spending stimulus being poured into the economy.

Higher energy and food prices because of the war in Ukraine are external headwinds beyond Beijing’s control, as is policy tightening by the major central banks to tame inflation. What is in Beijing’s remit, a recalibration of the zero Covid strategy to reduce growth trade-offs, will be minimal at most.

Downside risks include larger-scale outbreaks of more contagious virus variants that trigger further widespread lockdowns under the zero-COVID strategy. In addition, delayed price and balance sheet adjustments in the property sector could cause a sudden, wider crisis or a protracted adjustment with broader macro-financial spillovers. A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors. For example, further tightening of supply bottlenecks could cause higher consumer goods prices worldwide, but lower demand might ease commodity pressures and intermediate goods inflation.

Overall, the IMF expects slower growth and trade and higher inflation globally. It now puts global growth at 3.2% this year and 2.9% next, although it acknowledges that the risks are ‘overwhelmingly tilted’ to the downside. Its ‘plausible alternative scenario’, in which risks materialize and global growth slows to 2.6% this year and 2.0% in 2023, looks as plausible as its baseline scenario.

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China’s Debt Diplomacy Takes A Credit Hit

SRI LANKA AND Pakistan might count as among the ‘dangerous and chaotic places’ that President Xi Jinping last November advised Belt and Road (BRI) investors to avoid. Both are strategically important waystations along the BRI that are under severe financial stress and in political turmoil.

As friends of China, both would be looking east for assistance, aid that Beijing is being slow to provide. It has not yet reissued a promised $4 billion of loans to replace those Pakistan paid off in late March. Nor has it responded to Sri Lanka’s request for $2.5 billion in credit support.

China has become the largest government creditor over the past decade. Its state-owned policy banks often best the International Monetary Fund (IMF) and the World Bank in annual lending to developing countries.

The scale of that lending and the lack of transparency as to its terms have drawn criticism for exacerbating debt problems in poorer countries and accusations of ‘debt-trap diplomacy’.

Sri Lanka and Pakistan’s optimism that Beijing will come through for them is running into a new realism in Beijing. This is already evident in China’s circumspect approach to debt relief in Africa.

At last November’s high-level BRI symposium, Xi urged a cautious approach to lending along the Belt and Road. For the past couple of years, it has been apparent to top leadership that China’s banks have taken on too much debt in countries with uncertain repayment prospects.

A slowing economy at home and the persistence of domestic financial stability concerns have only made these worries more acute.

Securing approval for new credit lines is becoming harder even for policy banks as authorities emphasise the need for improved risk management and controls.

Sri Lanka has already turned to IMF in Washington for help with preparing an economic recovery programme as a basis for restructuring its debt and emergency financial assistance. Pakistan’s new leaders also plan to work with the IMF to stabilise the country’s economy.

Sri Lanka, in particular, will have as weak a negotiating hand with the IMF as it has had with Beijing.

China’s concern will be that Sri Lanka will have to accede to IMF demands, including who should occupy key government positions. That could mean a government less well disposed to China than some of its predecessors.

Similarly, the ousting of Imran Khan as Pakistan’s prime minister may cost Beijing a friendly if not necessarily firm ally in a country that provides an essential connection between the BRI’s two halves.

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China’s State-Owned Enterprises Will Take Larger Strategic Role

AS TENDS TO be the case with the IMF’s Article 4 reports on the Chinese economy, there is little that is controversial in the overarching analysis and prescriptions of the latest one, released on January 28.

This is the nub of the report:

China’s recovery is well advanced—but it lacks balance and momentum has slowed, reflecting the rapid withdrawal of fiscal support, lagging consumption amid recurrent COVID-19 outbreaks despite a successful vaccination campaign, and slowing real estate investment following policy efforts to reduce leverage in the property sector.

Regulatory measures targeting the technology sector, intended to enhance competition, consumer privacy, and data governance, have increased policy uncertainty.

China’s climate strategy has begun to take shape with the release of detailed action plans. Productivity growth is declining as decoupling pressures are increasing, while a stalling of key structural reforms and rebalancing are delaying the transition to “high-quality”—balanced, inclusive and green—growth.

If anything caught this Bystander’s eye, it was the report’s comments on state-owned enterprises (SOEs) and the somewhat prickly response from China.

These came in a section on how market participants view the wave of regulatory measures mentioned above as undercutting the role of private enterprises. It raises concerns, the report says, about state intervention using non-market-based measures. At the same time, there has been little or no progress in core areas of market-enhancing reforms, such as removing implicit guarantees for state-owned enterprises.

Indeed, there are signs that SOEs will continue to play a significant role in implementing government priorities going forward—for example, with regard to improving technological self-reliance and implementing the climate agenda.

The report’s view is that China’s slowing productivity growth and market dynamism — the entry of young, innovative firms has declined in recent years — is unlikely to revive without SOE and competitive neutrality reforms. China’s business dynamism has declined since the early 2000s, with the still-large role of SOEs a key factor.

SOEs are, on average, 20% less productive than private firms in the same sector, and the decline in business dynamism is particularly pronounced in industries and regions with large SOE presences.

The role of SOEs in the economy remains significant, the report notes, even as profitability is declining, reflecting SOEs’ contributions to economic stabilization efforts during the crisis and their implicit obligations to help implement state climate goals and increase R&D spending for the development of homegrown technologies.

Restarting SOE reform, the report says, could help close the large productivity gap between SOEs and private firms and potentially raise output by around 4% over the medium to long term.

Overall, the profitability of SOEs is weak, and about one in three make losses. Fiscal risks from SOE debt are rising and exacerbated by often illiquid SOE assets. More profitable SOEs could also boost dividend payments to government budgets to provide further resources to meet pressing social spending needs.

Needed reforms include ending preferential access to credit and implicit guarantees for SOEs to ensure competitive neutrality between private and state-owned firms, and improving SOE governance to limit the potential economic and fiscal costs of weak management and mismanagement.

A gradual and well-communicated approach to reform would be required, especially in regions with weak public finances.

A series of defaults by local SOEs has already created investor uncertainty about state support. However, the government response has been stricter supervision rather than reform.

Chinese authorities agreed with the IMF staff preparing the report that there is a need to deepen reform efforts to counteract a declining trend in productivity growth. They pointed to SOE reforms to improve corporate governance and competition policies to address local protectionism. However, they stressed that external decoupling pressures are adding critical headwinds to productivity growth which, in their view, necessitate an increased role for SOEs in strategic sectors.

Should the SOE-focused R & D strategy fail, that greater role would come with an elevated medium-term risk of a faster decline in productivity growth, especially if technological or financial decoupling increased due to external tensions.

In his formal response to the report, Jin Zhongxia, China’s Executive Director at the Fund, defended the progress made in the three-year (2020-2022) SOE reform plan, claiming 70% of its goals had been achieved by the end of 2021.

Yet he pushed back firmly against the recommendation to phase out ‘implicit guarantees’ to SOEs, claiming they were more perceived than real. He stated that SOEs are separate commercial entities from the government and that there are no implicit guarantees.

Jin also took a swing at the interest and exchange rate policies of ‘major developed countries’ (for which read the United States primarily), which he said provided ‘a blanket subsidy to all their companies’, adding:

Large private companies in some major developed countries can legally lobby and collude with politicians and can enjoy implicit protection and preferential procurement. In addition, China’s companies, both public and private, are victims of unfair competition in the form of technology and supply sanctions and market restrictions under the name of national security.

The words pot, kettle and black come to mind.

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IMF Lowers China Growth Forecast

Screenshot of IMF's World Economic Outlook web page, accessed January 26, 2022

THE INTERNATIONAL MONETARY FUND Fund has sharply lowered its forecast for China’s economic growth in 2022, pointing to the continuing ‘retrenchment of the real estate sector and slower-than-expected recovery of private consumption’.

In its newly published update to its World Economic Outlook, the Fund is forecasting GDP growth of 4.8% for the year, 0.8 of a percentage point lower than its previous forecast in October.

The IMF says that disruption in the housing sector has been a prelude to a broader slowdown.

With a strict zero-COVID strategy leading to recurrent mobility restrictions and deteriorating prospects for construction sector employment, private consumption is likely to be lower than anticipated.

For 2023, the IMF sees a modest recovery to 5.2% growth, but that is still one-tenth of a percentage point less than anticipated in October.

The main downside risk that the IMF sees is the crisis in the property sector dragging on as policymakers continue to lower the debt level in the economy.

The baseline assumes a significant moderation in real estate investment growth in 2022, reflecting continued tight policies to rein in risks related to leveraged property developers. If the real estate slowdown intensifies further and balance sheet stresses spread beyond property developers, exposed banks and other financial intermediaries may be forced to shrink credit to the broader economy. Such an outcome would hold back investment and consumption, dragging overall growth lower with adverse implications for commodity exporters and other emerging markets.

Should that happen it would have spillover effects in the region. Emerging-market assets are already under pressure from inflation, the policy outlook and expected monetary tightening by the US Federal Reserve.

Overall, the IMF expects global growth to slow to 4.4% this year from 5.9% in 2021, which is half a percentage point lower for this year than in its October outlook.

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IMF Calls For China To Connect Climate And Rebalancing

Screenshot of IMP Country Page for China, accessed November 22, 2021

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.

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IMF Nibbles Back Its China Growth Forecasts

THE INTERNATIONAL MONETARY FUND has cut its forecasts for China’s growth to 8.0% this year and 5.6% next. That is a one-tenth of a percentage point trim from its July projections for both years and a four-tenths of a percentage point cut for this year from its cheery April forecast.

Its projection for 2022 is the same as its April number, suggesting it sees this year’s drags on growth gradually easing next year and Beijing’s managed long-term slowdown in growth returning to its planned trajectory.

The figures are contained in the IMF’s latest World Economic Outlook update, published for this week’s joint annual meetings with the World Bank.

The IMF is habitually more bullish in its forecasts for China’s growth than other international agencies and many private economists. (This Bystander will forego any cheap shots at the Fund, which is embroiled in an unsightly scandal involving its managing director allegedly seeking to trade off a higher ranking for China in the World Bank’s Doing Business report for Beijing’s support for a capital increase.)

The latest lowering of the IMF’s forecasts for China are in line with the slightly more unsettled outlook it is adopting overall in the face of the uncertainties that the Delta variant, supply chain disruptions and inflationary pressures are bringing to economic activity globally.

The Fund says the reason for marking down China’s prospects this year is stronger-than-anticipated scaling back of public investment. However, were the energy or real estate crises to worsen, that could lead to renewed stimulus. Expectations of significant monetary tightening this year and carrying into 2022 after last year’s sizeable fiscal expansion, based on the government’s 2021 budget and the fiscal outturn to date, would then be moot.

The IMF also notes the increasing disruptions to supply and the challenge to monetary policy from increasing risk-taking in financial markets and rising fragilities in the nonbank financial institutions sector.

Both are concerns with direct application to China, with the downside risks from both increasing, if anything.

The Fund underlines the need for clarity and consistency of actions for avoiding unnecessary policy accidents that roil financial markets and set back the global recovery. It mentions explicitly disorderly debt restructurings in China’s property sector and escalations in cross-border trade and technology tensions, notably between the United States and China.

It concludes that a decoupling of basic scientific research between the United States and China could have significant adverse effects on global productivity, with an estimated first-round decline of up to 0.8%.
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IMF Trims China Growth Forecast

Screenshot of IMF World Economic Outlook Update, July 2021

THE 0.3 OF a percentage point that the International Monetary Fund added to forecast for China economic growth this year in April has been removed again in its July update.

In its newly published World Economic Outlook update, the IMF has reverted to its January forecast of 8.1% GDP growth this year but has nudged up its estimate for 2022 to 5.7% from April’s 5.6%.

For the world economy as a whole, it is holding its 2021 forecast at 6.0% but raising that for next year to 4.9% from April’s 4.4%, while noting the developing divergence between economies with good access to Covid-19 vaccines against those without. China falls into the first category.

The IMF points to Beijing’ scaling back of public investment and overall fiscal support as the reason for the downward revision for 2021.

A further indication of the continuing slowing of the recovery is that the IMF is forecasting year-on-year growth of 4.2% in the fourth quarter of this year.

That is in line with indications from both authorities and high-frequency economic indicators that the recovery of the domestic economy is labouring.

It has been exports that have carried growth. Those are at risk if a third wave of the pandemic, driven by the Delta variant, takes hold in China’s key foreign markets.

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IMF Trims Growth Forecasts For China

Screenshot of IMF press release on World Economic Outlook update, January 2021

THE INTERNATIONAL MONETARY FUND has trimmed its forecasts for China’s growth this year and next.

It is now projecting 8.1% growth this year and 5.6% growth in 2022. That is one- and two-tenths of a percentage point, respectively, lower than in its previous forecasts published last October.

Its latest projections are contained in its newly published update to its World Economic Outlook. Its forecast for the global economy is for 5.5% growth this year and 4.2% in 2022, after a 3.5% contraction in 2020.

The Fund notes that China’s strong recovery in 2020 reflects ‘effective containment measures, a forceful public investment response and central bank liquidity support’. This Bystander expects all three to carry into this year.

The Fund also says

Surging infections in late 2020 (including from new variants of the virus), renewed lockdowns, logistical problems with vaccine distribution, and uncertainty about take-up are important counterpoints to the favorable news. Much remains to be done on the health and economic policy fronts to limit persistent damage from the severe contraction of 2020 and ensure a sustained recovery.

Though written in the context fo the global economy, it applies to China, too.

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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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China’s Economy Rebounds But Risks Abound Ahead

NEXT MONDAY’S SCHEDULED release of third-quarter GDP number allows an excuse to catch up, albeit belatedly, with the International Monetary Fund’s latest World Economic Outlook, in which the Fund upgraded its forecast of China’s growth this year to 1.9%. That is almost a percentage point higher than its projection made in June.

As the third-quarter GDP figure is likely to indicate following some strong high-frequency indicators, the country is on track to be the only G20 economy to grow this year. Ruan Jianhong, head of the central bank’s statistics department, let slip at a news conference that third-quarter GDP growth is expected to be higher than in the second quarter, which was 3.2%. At the very least, that would all but cancel out the first-quarter contraction.

For next year, the Fund is expecting 8.2% growth as the rebound continues along with a modicum of stimulus to sustain it. By way of context, this means that by the end of next year, China’s economy is likely to have grown by 10% from where it was at the end of 2019 while no other large economy will even have got back to where it was before Covid-19 started to sweep the world.

The IMF says it bases its upgrade on Beijing’s effort to contain the pandemic and both the fiscal and monetary stimulus subsequently applied. These maintained household disposable income, firm’s cash flows and supported the provision of credit. This Bystander only hopes that the Fund is not being too sanguine in concluding that these actions have prevented a recurrence of the still-persisting debt problems caused by the stimulus that followed the 2008 global financial crisis. We do note, however, the Funds ‘so far’ caveat.

Looking at the disaggregated data, the Fund sees manufacturing doing better than services, especially services involving face-to-face contact.

The IMF sees three classes of countries benefitting from China’s rebound, commodities exporters, those countries connected to the Chinese economy through global value chains, and those countries involved in the international efforts to develop a Covid-19 vaccine.

The downsides to the IMF’s China forecasts are the same as they are for the rest of the world: a ‘second wave’ resurgence of infection and limited or ineffectual supplies of vaccine. For China, there is a third risk beyond the obvious one of a further deterioration in trade and technology relations with the United States. It is that those first two impact the rest of the world so severely that recovery is even slower and more protracted that it looks like it will be, squeezing global demand.

In the medium-term, once next year’s strong cyclical rebound is passed, the prospect is that the structural slowdown in China’s growth that preceded the pandemic as the economy rebalanced will resume.

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