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IMF Cuts China Growth Forecasts, Frets About Property Crisis

Screenshot of cover page of IMF's World Economic Outlook, October 22

The International Monetary Fund has again cut its growth forecasts for China. Its newly published World Economic Outlook expects the economy to grow by 3.2% this year and 4.4% in 2023. 

These are cuts of one-tenth and two-tenths of a percentage point, respectively, from the forecasts it made in July and 1.2 percentage points and seven-tenths of a percentage point from April’s forecasts. 

GDP growth of 3.2% would be the lowest in more than four decades, excluding the initial Covid-19 crisis in 2020. China’s economy grew by 8.1% in 2021 as it recovered from that.

These latest revisions should be seen in the context of a global economy forecast to grow at 3.2% this year, unchanged from July’s forecast, but slowing to 2.7% in 2023, two-tenths of a percentage point less than forecast in July, and down from 6.0 growth in 2021.

The Fund points to two main drags on China’s growth:

  • continuing weakness in the property sector, where it warns that further deterioration could spill over to the domestic banking sector, which would have adverse effects outside the country; and 
  • the anti-Covid lockdowns, which have imposed sizable constraints domestically and gummed up already strained global supply chains. 

The Fund says that pandemic-related forces have been significant in China, with its second-quarter contraction contributing to slower global activity. 

Temporary lockdowns in Shanghai and elsewhere due to COVID-19 outbreaks have weakened local demand, which is reflected in the new-orders component of the purchasing managers’ index. Other data corroborate this picture of slowing economic activity in China. Manufacturing capacity utilization in the country, for example, slowed to less than 76 percent in the second quarter: its lowest level in five years, except during the acute phase of the pandemic. 

Such disruptions not only slow the domestic economy but are felt more broadly. Lower demand in China implies fewer exports for foreign suppliers. At the same time, capacity constraints in production and logistics delay the unclogging of supply chains, keeping global supply pressures—and hence inflation—elevated. 

Pedalling as softly as it can, the Fund calls on Beijing ‘to pave the way’ for a safe exit from the zero-Covid strategy, including by adding to the country’s successful vaccination campaign, especially for the undervaccinated elderly. 

The Fund recites a litany of downside risks to the global economy, from a Covid resurgence to monetary policy divergence. In that last regard, China is already an outlier, with the People’s Bank of China cutting interest rates when other central banks are raising them.

However, the signs of a significant slowdown in the real estate sector, historically an engine of growth for China’s economy, exercise the IMF, which says that the sector’s downside risks dominate the outlook for China’s growth recovery. 

The decline in real estate sales prevents developers from accessing a much-needed source of liquidity to finish ongoing projects, putting pressure on their cash flows and raising the possibility of further debt defaults. Concerned with the delay in the delivery of residential units, thousands of buyers are calling for a moratorium on mortgage payments that would lead to forbearance and exacerbate the risk of nonperforming loans for banks, as well as the liquidity squeeze developers face. Uncertainty about the property sector could also have an impact on consumption and local government finances.

The Fund fears that further intensification of these negative feedback loops between housing sales and developer stress risks a larger and more protracted contraction.

This would be a large blow, given that the real estate sector makes up about one-fifth of GDP in China. Furthermore, the potential for banking sector losses may induce broader macro-financial spillovers that would weigh heavily on China’s medium-term growth.

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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 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 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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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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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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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 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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