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IMF Again Ups China Growth Forecast

Screenshot of IMF's World Economic Outlook, April 2021

THE INTERNATIONAL MONETARY FUND has upped its forecast of China’s growth rate this year to 8.4%, an increase of 0.3 percentage points from its January forecast.

The latest number is included in the IMF’s newly published World Economic Outlook. However, the Fund is holding its 2022 forecast unchanged at 5.6%.

For the global economy as a whole, the IMF has raised its forecast to 6% for this year and 4.4% for next, increases of 0.5 and 0.2 percentage points respectively from January’s forecasts.

Beyond 2022, the Fund expects global growth rates to moderate further, in part because China’s growth will be slowed by ‘necessary rebalancing to a sustainable growth path’, with Beijing scaling back the forceful public investment central bank liquidity support that facilitated the early and robust recovery from Covid-19.

However, the IMF expects only a mild tightening in 2021 of last year’s sizeable fiscal expansion, while monetary policy is expected to remain supportive this year and gradually tighten to around neutral in 2022.

Prominent among the downside risks to the forecasts are tensions between the United States and China that remain elevated on numerous fronts, including international trade, intellectual property, and cybersecurity.

The Fund also makes a passing nod to the medium-term demographic challenge that will face China (and others) as its population ages:

Global growth is expected to moderate to 3.3 percent over the medium term—reflecting projected damage to supply potential and forces that predate the pandemic, including aging-related slower labor force growth in advanced economies and some emerging market economies.

The need to clear the middle-income trap is bearing down fast on Beijing.

Update: At the press conference for the IMF’s latest Fiscal Monitor, fund officials repeated the need for structural reform:

Quite importantly, going forward, China can use fiscal policy to facilitate the transformation to a new growth model in China, a model that relies less on investment in public infrastructure, relies more on private consumption and support to households. In that context, strengthening social safety nets in China and reforming the tax system are important opportunities for progress.

Nothing new in the IMF’s line, or much out of line with Beijing’s own long-term plans. The question remains timing.

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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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IMF Cuts China GDP Forecast As Pandemic Weighs More Heavily

THE INTERNATIONAL MONETARY FUND has trimmed its forecast’s for China’s GDP growth this year by one-fifth of a percentage point to 1%. That is in line with the most recent estimates by its sister organisation, the World Bank, although both are more optimistic than the OECD.

The Fund has reduced its forecast for growth next year by a full percentage point to 8.2%. That cut reflects the likely drag of a world economy that the Fund expects to contract by 4.9% this year, against the 3% contraction it forecast in April.

Its newly published update to its World Economic Outlook says:

The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.

Given China started to reopen in April, the Fund is expecting fourth-quarter growth for the Chinese economy to be 4.4% higher than in the corresponding quarter of 2019 thanks to government stimulus.

Policy has focused on vulnerable firms and households, including through the expansion of the social safety net, public health services and digital infrastructure. The risk remains that millions of households will fall through the gaps and will be left considerably poorer than before the pandemic. Consequent worries on the part of authorities about social unrest will thus persist, albeit at a low level and likely localised.

The relatively better economic performance of China than most other countries can also be found in this list of factors identified by the IMF:

  • the evolution of the pandemic and the effectiveness of containment strategies;
  • variation in economic structure, eg, dependence on severely affected sectors, such as tourism and oil;
  • reliance on external financial flows, including remittances; and
  • pre-crisis growth trends.

The risks, as the IMF notes, are mostly to the downside, but not exclusively. The recovery in investment and services in China through May was stronger than anticipated, offering at least one example of economic normalisation proceeding faster than expected. Progress in developing vaccines and therapeutics may come to the economy’s support. Changes in production, distribution and payment systems forced by the pandemic could spur productivity gains from accelerated digitalisation and environmental benefits from a switch from fossil fuels to renewables.

However, there are more dark clouds than silver linings, from the possibility of a second global wave of infections, of which the recent Beijing cluster may be prologue, to global trade recovering more slowly than expected. The United States could play a big part in both, but the darkest cloud, as the Fund notes without expressing it in such terms, is escalating tensions between Washington and Beijing on multiple fronts.

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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.

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IMF Weighs The Cost Of The US-China Rift

Screenshot of cover of MF's October 2019 World Economic Outlook and China data chat. Illustration credit: Bystander Media.The global economy is slowing. The US-China trade dispute is a big part of that. The International Monetary Fund’s latest update to its World Economic Outlook has reduced the forecast for global economic growth to the slowest since the 2008 global financial crisis, with the trade dispute between Beijing and Washington reducing global GDP in 2020 by 0.8 of a percentage point. For China, in particular, the Fund also factors in the fact that backing off deleveraging to prop up domestic demand has further dampened the outlook.

Growth has also weakened in China, where the regulatory efforts needed to rein in debt and the macroeconomic consequences of increased trade tensions have taken a toll on aggregate demand. Growth is projected to continue to slow gradually in coming years, reflecting a decline in the growth of the working-age population and gradual convergence in per capita incomes.

The IMF is now forecasting GDP growth for China of 6.1% this year and 5.8% in 2020.  That is a trim of 0.1 of a percentage point and 0.2 respectively from its forecast made as recently as July, and of 0.2 and 0.3 from its April forecast. China’s GDP growth last year came in at 6.6%. The Fund’s projections for the global economy are for a slowdown to 3.0% this year from 3.6% in 2018 but picking up to 3.4% in 2020.

As noted earlier, the Fund estimates that US-China trade tensions will cumulatively reduce the level of global GDP in 2020 by 0.8 percentage points. Global monetary easing in the absence of inflationary pressures has helped offset that. In addition, both Beijing and Washington have turned to fiscal stimulus to counter the negative impact of their tit-for-tat tariffs.

One the net effects of this is that while the emerging and developing economies of the region will remain the main engine of the global economy, their growth is what the Fund calls ‘softening gradually’ as China undergoes a structural slowdown. The Fund expects China’s economy to be growing at 5.5% by 2024.

The Fund’s policy prescriptions for pursuing sustainable and quality economic growth while navigating headwinds from trade tensions and weaker global demand offer some pointers as to where Beijing may be willing to make concessions to Washington that are in its long-term interest.

Any further stimulus should emphasize targeted transfers to low-income households, rather than large-scale infrastructure spending. In support of the transition to sustainable growth, regulatory efforts to restrain shadow banking have helped lessen reliance on debt, but corporate leverage remains high and household debt is growing rapidly. Further progress with reining in debt requires continued scaling back of widespread implicit guarantees and enhancing the macroprudential toolkit. Meanwhile, continuing with reducing the role of state-owned enterprises and lowering barriers to entry in such sectors as telecommunications and banking would help raise productivity while improving labor mobility. Moving toward a more progressive tax code and higher spending on health care, education, and social transfers would help lower precautionary saving and support consumption.

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IMF, China And The Economic Elephant In The Room

Screenshot of IMF's Country Page for China

THERE IS SOMETHING other-worldly about the International Monetary Fund’s new report on its latest Article 4 Consultation with China: a rational analysis of structural economic reform amidst a maelstrom of tensions between Washington and Beijing.

The Fund’s report outlines the recent progress made by China in reducing financial sector fragilities and continuing to open up of the economy. It stresses the need for ‘staying the course on deleveraging and financial de-risking’ and for further progress in addressing distortions that encourage excessive household savings. It urges more reforms to enhance the social safety net and make the tax system more progressive.

It promotes greater exchange rate flexibility and deeper foreign-exchange markets to help the financial system prepare for increased capital flow volatility. It calls for increasing the role of the market and reducing the dominance of the public sector in many industries. It highlights the need to continue to move to a more price-based monetary policy framework and to address the misalignment of centre-local fiscal responsibilities.

All are laudable policy points, for which the Fund has long argued. The report summarises its prescriptions thus:

• Adjust macro policies and allow for a more flexible exchange rate. The announced policy measures are sufficient to stabilize growth in 2019 provided there are no further increases in tariffs. If trade tensions escalate further, additional stimulus, mainly fiscal, would be warranted.
• Improve external policies and frameworks by working constructively with trading partners to better address shortcomings and enable a trading system that can more readily adapt to economic changes in the international environment. The global economy would benefit from a more open, stable, and transparent, rules-based international trade system. China can also benefit from further opening up and other structural reforms that enhance competition.
• Continue strengthening the financial sector by fully implementing the announced regulatory reforms, strengthening bank capital, especially for smaller banks, and enhancing macroprudential tools to address vulnerabilities from rising household debt. Developing a clear resolution regime would facilitate the exit of weak banks. Removing the implicit guarantees and hardening the budget constraints for state-owned enterprises (SOEs) would improve credit allocation and limit SOEs’ advantage in accessing credit.
• Boost competition by opening up non-strategic sectors, particularly in services, to private and foreign enterprise, and unifying product markets across localities.
• Modernize policy frameworks by eventually moving to a single policy rate in the monetary policy framework, reducing the misalignment of centre-local fiscal responsibilities, and further improving transparency and statistics.

The elephant in the room is identified with masterful understatement by the first sentence of the accompanying press release: “The Chinese economy is facing external headwinds and an uncertain environment”.

The consultation and report predate the latest round of tariffs announced (and partially delayed) by the United States on Chinese exports and the Trump administration’s labelling of China as a ‘currency manipulator’, a designation that will drag the IMF unwillingly into that aspect of the trade war between Washington and Beijing.

It already has had Fund officials dancing gingerly around the question. In their view, China has not for some years been a predatory currency manipulator in the way US President Donald Trump now suggests to keep the yuan cheap to help Chinese exporters. If anything, of late, Beijing has been propping up the currency.

As this Bystander has previously noted, the conflict between the Trump administration and China goes beyond bilateral trade. It extends to structural issues related to the foreign investment regime, intellectual property protection, technology transfer, industrial policy, cybersecurity and the economic role of the Chinese state.

On many of these fronts, Fund staff would be happy for Washington to make headway, provided that it lead to more opening up of China’s economy in line with their long-standing policy recommendations. They would be less pleased, however, if any U.S.-China agreement resulted in managed trade. That, they believe, could negatively affect the multilateral trading system, and lead to an even more uncertain and challenging environment than we now have.

Even in the likely event that the two countries do not reach a comprehensive and durable agreement any time soon, persistent uncertainty is likely to weigh on both the near and longer-term economic outlook as China’s access to foreign markets and technology may be significantly reduced. That would mark a decoupling of the two largest economies that would be anything but ethereal.

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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.

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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.

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Structural Slowdown in China’s Economy Already Six Years In

Much is said about if and when China will shift, as would be expected after three decades of 10%-plus annual GDP growth, to a new phase of slower economic expansion. The International Monetary Fund suggests it may already have happened.

In its latest annual Regional Economic Outlook for Asia and the Pacific, it says that China’s trend growth peaked in 2006-07 at 11% and has been on the decline since. In other words what has happened to growth rates since is not the consequence of a cyclical slowdown caused by the global financial crisis but the start of a structural change to the economy. The IMF’s economists note that the same happened to India’s economy just shortly afterwards. Its trend growth peaked at 8%.

For both countries, the IMF says, the slowdown seems to have been driven largely by a decline in trend total factor productivity growth — broadly that they are getting less productivity gain from technological and process change — though to this Bystander that could be symptom as much as cause. The IMF says China’s medium-term trend growth is now 8%, the same, as it happens, as its forecast for GDP growth this year.

The Fund’s economists acknowledge that their methodology is intrinsically backward looking. That though lets them dodge the hard question, how much farther down the declining arc of trend growth is there to go?

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A Stimulus Warning From The IMF

This Bystander notes that the latest update to the International Monetary Fund’s Global Financial Stability Report holds the following warning for Beijing:

A large policy-induced credit stimulus could be less effective, and certainly less desirable, than in 2008/9. Relative to other [emerging markets], large economies such as Brazil, China, and India have benefited from strong credit growth in recent years, and are at the late stages of the credit cycle. Expanding credit significantly at the current juncture would heighten asset quality concerns and potentially undermine GDP growth and financial stability in the years ahead.

Policy makers in Beijing are aware that resorting to pumping cash into the economy through infrastructure spending will only delay its necessary rebalancing, but the niggling refusal of the economy’s slowdown to bottom out is increasingly forcing their hand against their better judgement.

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