Tag Archives: International Monetary Fund

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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Beijing’s $43B Big Stick

Beijing is making a fat down payment on taking a larger role on the international stage. The $43 billion China has pledged towards the replenishment of the International Monetary Fund’s coffers is conditional on implementing outline reforms of the Fund’s voting structure agreed in 2010. More room for China, and the four other Brics, who have spearheaded this latest replenishment as the Fund gathers the wherewithal to bail-out the eurozone if necessary, is being made by the U.S. and Canada not participating.

Voting power at the IMF is largely a function of capital contributions. The required size of a country’s contribution, its quota, is determined by a formula that comes down to economic clout. The 2010 reforms propose a 6% shift of quota from developed to emerging economies. The effect will be to give China the third most votes at the Fund. All the Brics will move into the top 10. The Fund aims to ratify the changes, which require the approval of its member nations, at is 2014 annual meeting. It is not for nothing that the Beijing and its fellow Brics are holding back their latest money until the Fund’s existing bail-out supplies are exhausted, in case a reminder of who holds the big stick is required.

Beijing and the other Brics have also agreed to study further currency swaps and pooling their foreign exchange reserves. This is being billed as a means to create pools of liquidity available to help stabilize the international financial system should it be required, but it will also advance Beijing’s agenda of gradually internationalizing the yuan. Finance ministers and central bank governors from the Brics will report back on this at next year’s Brics summit in South Africa. As always, follow the money.

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IMF Sees Sharp Dip In China’s Growth

The International Monetary Fund has sharply cut its forecasts for China’s growth this year and next. In its latest half-yearly update to its World Economic Outlook, the Fund has reduced its forecast for 2012’s GDP growth to 8.2% from the 9% it forecast in September, and to 8.8% from 9.5% for 2013. The cuts come against a background of what it says are dimming prospects for the global economy and increasing risks to financial stability. The IMF now expects the world economy to grow at 3.3% this year, down from 3.8% last year, with world trade growth slowing to 3.8% from 6.9%. The IMF puts China among those emerging economies that can afford “to deploy additional social spending to support poorer households in the face of weakening external demand”.

Earlier this month, the World Bank also cut its forecast for China’s GDP growth this year, to 8.4% from June’s 8.7%. But unlike the IMF, which foresees recovery in China’s economy in 2013, the Bank said it expected growth to continue slowing next year.

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China Mulls A New Long-Term Alternative To The Dollar

Another straw in the wind that China’s central bankers are toying with the idea of an alternative to the dollar as the global reserve currency: Hu Xiaolian, director of the State Administration of Foreign Exchange (SAFE) and a central bank vice governor, says that the IMF could raise funds quickly by issuing bonds, and that China “would actively consider” purchasing such debt.

Any purchases would presumably be funded by swapping out of China’s large holdings of U.S. Treasuries ($1.95 trillion at end-2008). Recently, Prime Minister Wen Jiabao expressed concern about the safety of U.S. Treasuries, although China has little alternative at this point for recycling its trade surplus (as both he and Hu acknowledge).

Hu’s remarks follow those by central bank Governor Zhou Xiaochuan that the IMF should aim in the long term to create a non-sovereign reserve currency, and those of Russian officials who say that China is one of the nations backed its call for a discussion on how to replace the dollar as the world’s primary reserve currency.

The Fund already has a currency of sorts in its special drawing rights, but Zhou would have something more tradable in mind. IMF bonds would be a step in that direction as well as letting China respond to international calls for it to boost its financial support for the IMF so the Fund can provide more money to nations hard hit by the global financial crisis.

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