China continues to transition to a more sustainable growth path as it pushes forward with necessary financial reforms, concluded the executive board of the International Monetary Fund (IMF) following a thorough review of its economy.
The IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. It then prepares a report for the executive board.
It found that the growth of the Chinese economy slowed to 6.7 percent in 2016 and is projected to remain at 6.7 percent this year due to the momentum from last year’s policy support, strengthening external demand, and progress in domestic reforms., the IMF said.
Inflation rose to 2 percent in 2016 and is expected to remain stable at 2 percent in 2017. Supervisory and regulatory action is being taken against financial sector risks, and corporate debt is growing more slowly, reflecting restructuring initiatives and overcapacity reduction.
Fiscal policy remained expansionary and credit growth remained strong in 2016. Growth momentum will likely decline over the course of the year reflecting recent regulatory measures which have tightened financial conditions and contributed to a declining credit impulse.
The current account surplus fell to 1.7 percent of GDP in 2016, driven by a sharp recovery in goods imports and continued strength in tourism outflows. It is projected to further narrow to 1.4 percent of GDP this year, due primarily to robust domestic demand and a deterioration in terms of trade.
After depreciating 5 percent in in 2016, the renminbi has depreciated some 2.75 percent since then.
The executive directors report said China’s continued strong growth has provided critical support to global demand. They commended the authorities’ ongoing progress in rebalancing the Chinese economy toward services and consumption. They noted that economic activity had recently firmed and saw this as an opportunity for the authorities to accelerate needed reforms and focus more on the quality and sustainability of growth.
Among its recommendations, the directors supported the importance of reducing national savings to help prevent domestic and external imbalances. In this regard, they emphasized the need for greater social spending and making the tax system more progressive.
They also welcomed the improvements in the performance of state-owned enterprises and urged further reforms, including hardening budget constraints, accelerating restructuring of underperforming debt, and allowing exit of non-viable firms.
Directors concurred that the immediate priority for fiscal policy should be to adjust the composition of the budget to support faster rebalancing and ease the costs of transition from an investment and credit led model. Directors agreed that having some fiscal space allows the pace of consolidation to balance concerns about growth and sustainability. They also underscored the importance of monitoring debt, noting that further efforts to reform central-local fiscal relations can help reduce risks arising from off budget spending.
The directors agreed that further improvements in policy frameworks are needed to maintain economic growth and stability in the medium term. They supported improving the fiscal framework to increase local government autonomy, reduce the scope for off budget spending, and centralize some expenditure responsibilities. They also called for completing the transition to a modern price based monetary policy framework. To inform better policymaking and investment decisions, the directors encouraged the authorities to continue to improve both the coverage and quality of officially provided statistics.
Finally, they supported a gradual tightening of monetary policy if core inflation continues to pick up.