IMF Trims Growth Forecasts For China

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.

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.

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.

No Surprise, IMF Sees US-China Rivalry Weighing On China’s Growth

THE JANUARY 2020 update to the International Monetary Fund’s World Economic Outlook, published to coincide with the opening of the World Economic Forum in Davos Switzerland, contains nothing in its outlook for China that will cause any of the forgathered business and economic elites to choke on their canapés in surprise.

The Fund’s summary is as follows:

Growth in China is projected to inch down from an estimated 6.1 percent in 2019 to  6.0 percent in 2020 and 5.8 percent in 2021. The envisaged partial rollback of past tariffs and pause in additional tariff hikes as part of a “Phase One” trade deal with the United States is likely to alleviate near-term cyclical weakness, resulting in a 0.2 percentage point upgrade to China’s 2020 growth forecast relative to the October WEO. However, unresolved disputes on broader US-China economic relations as well as needed domestic financial regulatory strengthening are expected to continue weighing on activity.

Growth for 2019 came in at 6.1%.

On the dispute between China and the United States, the IMF is realistic if downbeat:

Higher tariff barriers between the United States and its trading partners, notably China, have hurt business sentiment and compounded cyclical and structural slowdowns underway in many economies over the past year. The disputes have extended to technology, imperiling global supply chains. The rationale for protectionist acts has expanded to include national security or currency grounds. Prospects for a durable resolution to trade and technology tensions remain elusive, despite sporadic favorable news on ongoing negotiations.

The Fund’s forecast is a tad more optimistic than the World Bank‘s most recent, but the general direction is the same, a trend growth slowdown whose pace is vulnerable to external unpredictability.

IMF Calls For Fiscal Response To Hong Kong’s Contraction

THERE IS LITTLE to surprise in the International Monetary Fund’s newly published Article 4 report on Hong Kong. The impact of the tariffs wars between China and the United States, the slowdown in China and the world’s economy and months of social unrest have all hit the city’s exports, investment and consumption. The Fund is forecasting a 1.9% contraction of Hong Kong’s economy for 2019 and a cyclical recovery of 0.2% in 2020, with the risks all to the downside.

On the external side, further escalation of trade tensions between the U.S. and China and a significant slowdown of Mainland China as well as additional barriers, including potential restrictions by the U.S. against China in technology and the financial sectors, could negatively affect growth in Hong Kong SAR. On the domestic side, a deterioration of the sociopolitical situation and delays in addressing structural challenges of insufficient housing supply and high income inequality could further weaken economic activity and negatively affect the city’s competitiveness in the long term. A significant slowdown of the economy could trigger an adverse feedback loop between house prices, the real economy and the financial sector.

Beyond next year, the Fund sees a sub-par recovery as ‘increased trade barriers and disruptions to global supply chains would be a drag on trade-related activities’.

Prescriptive measures include more countercyclical fiscal support, such as the recent stimulus targeted at the most vulnerable households and small- and medium-sized enterprises. The Fund would like to see a medium-term fiscal package that would address longer-term structural challenges associated with housing market imbalances, the ageing population and income inequality. Tax reform should include phasing out the new residential stamp duty once systemic risks from non-resident inflows dissipate, the Fund says.

The Fund also underscored the importance of Hong Kong’s financial markets to continue to function smoothly in the face of external and domestic headwinds. Despite everything, the new-listings-boosted Hang Seng Index appears on track to end this year higher than where it started it, albeit below its April high.

IMF Sees No Reasons For China’s Economy Not To Stop Slowing

The IMF’s CHANGE in its forecasts for China’s growth this year and next go in opposite directions to those for the global economy as a whole.

In the new edition of its World Economic Outlook, The Fund projects 6.3% GDP growth this year and 6.1% in 2020. That is a one-tenth of a percentage point increase and reduction respectively on the Fund’s forecast in January, which in turn was unchanged from its forecast last October. However, for the world economy, it has cut its projections for this year but sees faster expansion in 2020.

The upgrade to the China forecast for this year is in large part technical. The Fund has dropped the assumption made in its previous forecast that the US tariff rate on $200-billion worth of trade would rise as threatened by the Trump administration to 25% from 10%.

China’s growth had started slowing in the second half of 2018 as a result of the measures to deleverage and rein in shadow banking, and the increase in trade tensions with the United States. At the same time, the consequent slower domestic investment was accompanied by softening consumption, particularly for cars, whose sales declined with the ending of incentive programs. The economy expanded by 6.8% in the first half of 2018, but by only 6.0% in the second.

For this year, the Fund expects economic conditions to improve as stimulus kicks in. Nonetheless, the external environment will be challenging: the advanced economies are slowing down; trade tensions with the United States are likely to persist regardless of any deal being struck in the near future, and there is likely to be a gradual tightening of financial conditions consistent with some further removal of monetary policy accommodation by the US Federal Reserve.

Even assuming no further increase in tariffs and a continuation of fiscal stimulus by Beijing, China’s economic growth is projected to slow this year and into next as the underlying forces that slowed growth in the second half of last year persist.

Longer term, the Fund sees a gradual slowing of the economy to 5.5% annual GDP growth by 2024. This is assuming the successful continuation of rebalancing towards a private-consumption and services-based economy and of the authorities’ actions to slow the accumulation of debt and mitigate its associated vulnerabilities.

This Bystander has less confidence in the second assumption than in the first. Cuts to personal income tax and value-added tax for small and medium enterprises should help stimulate domestic consumption. However, authorities also eased back on deleveraging and injected liquidity through
cuts in bank reserve requirements.

Any excessive stimulus to support near-term growth through a loosening of credit standards or a resurgence of shadow banking activity and off-budget infrastructure spending would heighten financial vulnerabilities — another reason that President Xi Jinping may be anxious to secure a deal with US President Donald Trump sooner rather than later.

If no deal is reached with the United States, that will cast a dark shadow over the medium-term outlook.

The Fund acknowledges that some centrally financed on-budget fiscal expansion in 2019 may be appropriate to avoid a sharp near-term growth slowdown that could derail the overarching reform agenda. However, it says this should avoid large-scale infrastructure stimulus and instead “emphasize targeted transfers to low-income households so as to lower poverty and inequality”.

It also lays out its familiar shopping lists of structural reforms:

Reducing leverage in the economy will require:
⁃ continued scaling back of widespread implicit guarantees on debt;
⁃ early recognition and disposal of distressed assets; and
⁃ fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs.
Continued rebalancing will require:
⁃ a more progressive tax code;
⁃ higher spending on health, education, and social transfers; and
⁃ reduced barriers to labour mobility.
Enhancing productivity growth will require:
⁃ reducing the footprint of state-owned enterprises; and
⁃ further lowering barriers to entry in certain sectors, such as telecommunications and banking.

As an endnote, the World Economic Outlook devotes a whole chapter to the link between bilateral trade tariffs and trade imbalances, and questions whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. Its conclusion is a rebuff to US President Donald Trump’s stated intention of using tariffs to cut the US trade deficit with China. It concludes that:

Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.

The paradox is that Trump’s tariffs will not achieve their stated aim of achieving balanced trade and have imposed a cost on US manufacturers and farmers, bu have got Beijing to the table to negotiate over structural reforms to its development model that it has never been prepared to talk about before.

IMF Sees China Slowdown As Only One Reason To Be Gloomy

THE INTERNATIONAL MONETARY Fund tags a greater-than-envisaged slowdown in China as one of the triggers beyond escalating trade tensions that could cause it to become even gloomier about global growth prospects.

In the latest update to its World Economic Outlook, the Fund has cut its October forecasts for global growth this year and next by 0.2 of a percentage point and 0.1 of a percentage point to 3.5% and 3.6% respectively.

For China specifically, the Fund says that, despite fiscal stimulus that offsets some of the impacts of higher US tariffs, its economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the United States.

A resumption of the ramping up of US tariffs after the March 1 expiry of the truce in the two countries’ trade dispute — and with it, presumably, retaliatory tariffs against the US on Beijing’s part — is one self-evident risk.

However, the Fund is holding to its October forecast of 6.2% growth in China in both 2019 and 2020. That will be down from this year’s 6.6%.

In detail, it says:

China’s economy slowed in 2018 mainly due to financial regulatory tightening to rein in shadow banking activity and off-budget local government investment, and as a result of the widening trade dispute with the United States, which intensified the slowdown toward the end of the year. Further deceleration is projected for 2019. The authorities have responded to the slowdown by limiting their financial regulatory tightening, injecting liquidity through cuts in bank reserve requirements, and applying fiscal stimulus, by resuming public investment. Nevertheless, activity may fall short of expectations, especially if trade tensions fail to ease. As seen in 2015–16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure.

Even The Ever-Optimistic IMF Frets Over China-US Trade Tensions

THE INTERNATIONAL MONETARY FUND has cut its forecast of China’s 2019 GDP growth by 0.2 percentage point to 6.2% because of the expected impact of tariffs imposed as a result of its trade dispute with the United States. In its newly published World Economic Outlook, the Fund also projects 6.6% growth for this year, down from 6.9% in 2017 as the policy measures to slow credit growth and deleverage the economy take effect.

However, the IMF expects China to apply domestic stabilisation measures that will boost growth in 2019 by 0.5 percentage points to offset the impact of the tariffs, which the Fund estimates to cut growth by 0.7 percentage points potentially.

The Fund’s baseline forecast takes account of tariffs announced by mid-September. Maurice Obstfeld, the director of the IMF’s Research Department, says he is less optimistic about a resolution to the trade dispute with the United States than he was six months ago. In one scenario modelled by the Fund, an escalation of trade restrictions could cut 1.6% of China’s GDP in 2019.

Obstfeld, who retires soon, also took what by the IMF’s diplomatic standards was a hugely political swing at ‘America First’ unilateralism. He concluded what will be his final forward to the Outook with this paragraph.

Multilateralism must evolve so that every country views it to be in its self-interest, even in a multipolar world. But that will require domestic [Obstfeld’s italics] political support for an internationally collaborative approach. Inclusive policies that ensure a broad sharing of the gains from economic growth are not only desirable in their own right; they can also help convince citizens that international cooperation works for them. I am proud that during my tenure, the IMF has increasingly championed such policies while supporting multilateral solutions to global challenges. Without more inclusive policies, multilateralism cannot survive. And without multilateralism, the world will be a poorer and more dangerous place.

Dealing with one aspect of ‘America First’, the US-China trade dispute, the People’s Bank of China has again just eased monetary policy, reversing its recent stance to rein in credit growth and address financial risks though deleverage.

The Fund says applying domestic stimulus will be at the long-term cost of delaying tackling China’s internal financial imbalances. It has advocated for some time that China should de-emphasise the quantity of growth and think more about the quality of growth and the economy’s resilience to financial instability — the shadow banking sector and over-leveraging in local government financing being two of the most glaring point of vulnerability.

“It will be important, despite growth headwinds from slower credit growth and trade barriers, to maintain the focus on deleveraging and continue regulatory and supervisory tightening, greater recognition of bad assets, and more market-based credit allocation to improve resilience and boost medium-term growth prospects,” the Fund says.

In its Financial Stability Report, issued the day after the World Economic Outlook, the IMF says:

In China, financial conditions have remained broadly stable, with an easing in monetary policy largely offsetting the impact of external pressures. China’s equity markets have weakened on rising trade tensions. Tighter liquidity resulting from earlier regulatory efforts to de-risk and deleverage the financial system has led to pockets of stress in corporate bond markets, which prompted Chinese authorities to ease monetary policy. The central bank injected liquidity via cuts to the required reserve ratio and through lending facilities. The exchange rate weakened further, down 7 percent against the U.S. dollar (and down 5 percent compared with a basket of 24 currencies) since mid-June, prompting authorities to reintroduce a 20 percent reserve requirement for foreign exchange forwards.

The trade-off between growth and stability is a difficult one for policymakers in any country. In China, that will always lean towards stability, which will likely mean a more accommodative macro policy stance and only fine-tuning to deleverage.

Hence the IMF repeats its mantra:

Despite a growing emphasis in China on the quality rather than the speed of growth, tensions persist between stated development goals and intentions to reduce leverage and allow market forces to play a larger role in the economy.

An overarching priority is to continue with reforms, even if the economy slows down, and to avoid a return to credit- and investment-driven stimulus. Key elements of the reform agenda should include:

• strengthening financial regulation and tightening macroprudential settings to rein in the rapid increase in household debt;
• deepening fiscal structural reforms to foster rebalancing (making the personal income tax more progressive and increasing spending on health, education, and social transfers); tackling income inequality by removing barriers to labor mobility and strengthening fiscal transfers across regions; and
• more decisively reforming state-owned enterprises; and fostering further market liberalization, particularly in services.

Addressing the distortions that affect trade and cross-border flows is also needed.

All of which, as ever, is more about domestic political priorities than economic policymaking.

Trade Tension And A Less Certain Outlook Cloud China’s Economy

THE INTERNATIONAL MONETARY FUND has held its growth projections for China unchanged even as it warned of growing downside risks to the global outlook.

The newly published July update to its World Economic Outlook puts its forecast GDP growth at 6.6% for this year and 6.4% for next. It cites softening world demand and regulatory and financial tightening as the reasons why.

The Fund’s forecast is in line with official figures for the second quarter released today by the the National Bureau of Statistics showing the economy growing by 6.7% year-on-year in the second quarter, the twelfth consecutive quarter of 6.7-6.9% growth.

Rebalancing, evidenced by private and public consumption contributing a record 78.5% of January-June GDP growth, continues as does excess-capacity reduction; mining sector output grew by at less than a quarter of the pace of overall industrial output.

Net export volumes shaved 0.7 of a percentage point off first-half growth as exporters and importers raced to beat the imposition of US tariffs. The effect of those are likely to be felt more severely in the second half of this year.

For its part, the IMF notes:

The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.

To trade tensions, the Fund adds rising US interest rates and commodity prices, notably oil, as among the most concerning downside risks to the global economy.

The Fund’s prescription that ‘avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion’ may find more resonance in Beijing that Washington these days, as will its call to preserve global economic integration under an open, rules-based multilateral trade system.

IMF Sees China’s Economy With Momentum To Face Headwinds

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.

Both numbers are one-tenth of a percentage point higher than the Fund’s forecast in October last year. They are also in line with the most recent forecasts from the World Bank and the OECD.

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.