Tag Archives: World Economic Outlook

IMF Bangs On A Familiar But Necessary Refrain

THE INTERNATIONAL MONETARY Fund has left its growth forecasts for China this year and next unchanged at 6.6% and 6.2%. However, in the newly published edition of its World Economic Outlook, the IMF notes that “China’s growth stability owes much to macroeconomic stimulus measures that slow needed adjustments in both its real economy and financial sector”.

Policy support and opened credit taps stabilised growth in the first half of the year close to the middle of authorities’ target range of 6½% –7% for the full year.

The Fund bangs on a familiar drum when it calls for more decisive action in tackling corporate debt and governance issues in China’s state-owned enterprises (SOEs). Lack of progress on these, it says, raises the risk of a disruptive adjustment from reliance on investment, industry and exports to greater dependence on consumption and services. Rebalancing could become ‘bumpier than expected at times,” the Fund warns. The current short-term stimulus on which China is relying and a still-rising credit-to-GDP ratio exacerbate that concern.

Credit dependency is increasing “at a dangerous pace, intermediated through an increasingly opaque and complex financial sector”. A combination of factors are at work here: “the pursuit of unsustainably high growth targets, efforts to prop up unviable state-owned enterprises to preserve employment and defer loss recognition, and opportunistic lending by financial intermediaries in the belief that all debt is implicitly guaranteed by the government”.

The IMF’s policy prescriptions are similarly familiar:
• address the corporate debt problem by separating viable from unviable state-owned enterprises, harden budget constraints and improve governance in the former while shutting down the latter and absorbing the related welfare costs through targeted funds;
• apportion losses among creditors and recapitalise banks as needed;
• allow credit expansion to slow and accept the associated slower GDP growth;
• strengthen the financial system by closely monitoring credit quality and funding stability, including in the nonbank sector; continue to make progress toward an effectively floating exchange rate regime; and
• further improve data quality and transparency in communications.

The medium-term outlook for China remains clouded by the high stock of corporate debt—a large fraction of which is considered at risk. And vulnerabilities continue to accumulate with the economy’s rising dependence on credit, which complicates the difficult task of rebalancing the economy across multiple fronts:

The medium-term forecast assumes that the economy will continue to rebalance from investment to consumption and from industry to services, on the back of reforms to strengthen the social safety net and deregulation of the service sector. However, non-financial debt is expected to continue rising at an unsustainable pace, which—together with a growing misallocation of resources—casts a shadow over the outlook.

Spillovers from China’s rebalancing and gradual slowdown via global trade and increasingly financial channels continue to concern the Fund. These have been significant, and China’s growing global role, the Fund says,  makes it all the more important for it to address its internal imbalances.

However, it also notes the other side of the coin:

The outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy.

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IMF Nudges Up China Growth Forecast, Cajoles On Reform

THE INTERNATIONAL MONETARY Fund has nudged up its growth forecasts for China over the next couple of years. The latest update to its World Economic Outlook says the Fund expects growth to be 6.5% this year and 6.2% next, both 0.2 percentage points higher than its January forecast, which in turn had been unchanged from last October’s.

These are both lower growth rates than 2015’s 6.9%, however. The Fund identifies policy stimulus as the reason for its revision, but adds:

A further weakening is expected in the industrial sector, as excess capacity continues to unwind, especially in real estate and related upstream industries, as well as in manufacturing. Services sector growth should be robust as the economy continues to rebalance from investment to consumption. High income growth, a robust labor market, and structural reforms designed to support consumption are assumed to keep the rebalancing process on track over the forecast horizon.

The Fund forecasts inflation to remain low at about 1.8% in 2016, reflecting lower commodity prices, the real appreciation of the renminbi, and somewhat weaker domestic demand.

It also notes the challenges of rebalancing and says with some understatement that the transition “has been bumpy at times”.

Slowing growth has eroded corporate profitability, which in turn, hinders firms’ ability to service their debt obligations, raising banks’ levels of nonperforming loans:

The combination of corporate balance sheet weakness, a high level of nonperforming loans, and inefficiencies in bond and equity markets is posing risks to financial stability, complicating the authorities’ task of achieving a smooth rebalancing of the economy while reducing vulnerabilities from excess leverage.

It also says:

Limited progress on key reforms and increasing risks in the corporate and financial sectors have led to medium- term growth concerns, triggering turbulence in Chinese and global financial markets. Policy actions to dampen market volatility have, at times, been ineffective and poorly communicated.

The risk is that:

A sharper-than-forecast slowdown in China could have strong international spillovers through trade, commodity prices, and confidence, with attendant effects on global financial markets and currency valuations.

That would be felt in both emerging market and advanced economies. On the upside well-managed rebalancing would ultimately lift global growth and reduce tail risks.

The Fund says the international community should therefore support Beijing’s efforts “to transit to a more consumption–and service–oriented growth model while reducing the vulnerabilities from excess leverage bequeathed by the prior investment boom”.

To that end, strengthening the influence of market forces in the Chinese economy, including in the foreign exchange market, is a key objective.  However:

Further structural measures, such as social security reform, will be needed to ensure that consumption increasingly and durably takes up the baton from investment. Any further policy support to secure a gradual growth slowdown should take the form of on-budget fiscal stimulus that supports the rebalancing process. Broader reforms should give market mechanisms a more decisive role in the economy and eliminate distortions, with emphasis on state enterprise reforms, ending implicit guarantees, reforms to strengthen financial regulation and supervision, and increased reliance on interest rates as an instrument of monetary policy.

The Fund notes the progress in financial liberalization and in laying the foundations for stronger local-government finances, but says, again, that the reform for state-owned enterprises needs to be more ambitious, clearly laying out and accelerating a substantially greater role for the private sector and hard budget constraints.

Easier to say than politically to execute. Little progress is being made on dismantling the clientelist structure of state-owned enterprises, as a reading between the lines of what this state media report on the recent meeting of the Leading Group for State-Owned Enterprises Reform doesn’t say highlights.

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IMF Says Structural Reforms Key To China Soft Landing

THE INTERNATIONAL MONETARY Fund has left its forecast for China’s GDP growth this year at 6.8%. That is broadly unchanged from its January update, though go down to two decimal places and there is a slight lowering of the forecasts. A year ago, the Fund was forecasting 7.3% growth for this year.

The number for the first quarter has come in at 7.0% year-on-year, down from 7.3% for the fourth quarter of last year and its slowest pace since the 2008 global financial crisis. The official target for the full year is ‘about 7%’.

The new edition of the Fund’s World Economic Outlook says Beijing’s attempts to rebalance the economy will continue to be a drag on growth, though managing the glide path of slowing the economy to a more sustainable long-term growth rate is the plan. “The authorities in China are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth. Hence the forecast assumes a further slowdown in investment, particularly in real estate,” the IMF says.

Its forecast for 2016 remains at 6.3% (again, a slight softening if you go to more decimal places). The effect of that will be felt in commodity-exporting countries and China’s main trade partners — and much more widely if China’s economy slows faster than that, the so-called ‘hard landing’.

The question domestically is the extent to which structural reforms and lower oil and other commodity prices will expand consumer spending, and thus moderate the pace of the overall slowdown. On the answer to that question lies the extent to which Beijing will need to make a monetary policy response, either by cutting interest rates or lowering banks’ reserve requirements ratios.

China has room to ease. Cheaper commodities, including oil, and the appreciation of the currency is keeping inflation low. The IMF forecasts consumer price inflation to be 1.2% this year and to increase gradually into 2016. However, as the Fund notes, “striking a balance between reducing vulnerabilities, supporting growth, and implementing reforms remains challenging”.

Giving market mechanisms a more decisive role, eliminating distortions, and strengthening institutions is key. The Fund underlines the need for financial and state-owned enterprise reforms to increase the efficiency of resource allocation and reforms in the pension system and other social safety nets to shift the composition of growth toward domestic consumption.

The need for such reforms are the more urgent because the demographics that underpinned the productivity gains that drove double-digit rates of growth for three decades are now moving against China more strongly than in any other leading emerging economy.

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Another Cut Forecast Of China’s Economic Growth

Change in IMF forecasts between July and October 2012 of China's GDP growth. Source World Economic OutlookThe World Bank and the OECD have already cut their growth forecasts for China for this year. Now comes the IMF. In its latest World Economic Outlook it says its expects China’s growth to be 7.8% this year, down from the 8% it expected in July (see chart, right). That would be the weakest growth in more than a decade.

The IMF does see growth picking up to 8.2% next year, though it had previously expected 8.4%. Achieving any pick-up will probably depend more on what policy makers in Europe and the U.S. do than those in Beijing. If the euro zone crisis worsens and the U.S. falls off its fiscal cliff, matching this year’s growth will be a challenge in itself.  “The balance of risks to the near-term growth outlook is tilted to the downside,” the Fund says.

Beijing is being cautious in its policy response to the slowdown, providing moderate monetary and fiscal stimulus. The massive spending spree after the 2008 global financial crisis still hasn’t played itself out. Another round of extensive bank-financed infrastructure spending is just too risky for still strained bank balance sheets. Nor is investment-driven growth sustainable if Beijing is serious about rebalancing the economy towards more domestic demand.

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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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