IMF completes Article IV review discussions with China

China.org.cn, June 10, 2011

An International Monetary Fund (IMF) team, led by Mr. Nigel Chalk, Senior Advisor of the Asia and Pacific Department, visited Beijing, Shanghai and Chengdu from May 23 to June 9 to conduct the annual Article IV review of the Chinese economy.

The team held wide-ranging discussions with senior officials from the government, the People's Bank of China, private sector representatives, and academics, to exchange views on prospects for the economy and the challenges ahead. The IMF's Acting Managing Director, Mr. John Lipsky, and the Director of the Asia and Pacific Department, Mr. Anoop Singh, joined the final policy discussions and met with Vice Premier Wang Qishan, People's Bank of China Governor Zhou Xiaochuan, and Finance Minister Xie Xuren.

The mission team also conducted for the first time a Financial Sector Assessment Program (FSAP) review, and held discussions on the spillover effects of Chinese policies on the global economy in the context of the latest Article IV consultation. The FSAP is a comprehensive and in-depth analysis of a country's financial sector, and is a key instrument of the Fund's surveillance and provides input to the Article IV consultation.

At the conclusion of the visit, the mission issued the following statement:

"The Chinese economy remains strong and is forecast to grow at around 9.5 percent in both 2011 and 2012 underpinned by solid domestic and external demand. Inflation should soon peak and is expected to fall to around 4 percent by year-end. However, there are upside risks, from higher global commodity prices or weather related food supply shocks in China.

"The steps taken by the Chinese authorities to tighten monetary policy, normalize credit growth, and withdraw fiscal stimulus are fully appropriate. A more balanced use of monetary policy tools, including more reliance on interest rates and less use of direct administrative limits on loan growth would help achieve the intended policy objectives more effectively.

"The measures that the authorities have progressively taken to slow down the rise in real estate prices are having the desired impact. However, China still has a propensity for property bubbles driven by high savings, cheap financing, low carrying costs, and the lack of alternative investment instruments. Any durable solution will need to involve broader financial development, a higher cost of capital, and increased real estate taxation.

"Staff expect the current account surplus to begin to rise this year as external demand recovers and the fiscal stimulus unwinds. A package of policies, many of which are included in China's comprehensive 12th Five-Year Plan, will need to be deployed in the coming years to prevent a reassertion of the current account surplus. Efforts will be required to strengthen the social safety net, raise household income, liberalize the financial system, and increase the costs of various inputs to production. A stronger renminbi will be a key ingredient of this comprehensive package of reforms and would very much be in China's interest, helping to achieve the objectives set out in the 12th Five-Year Plan.

"Drawing on the work of the FSAP, the mission particularly underlined the importance of financial sector reform in ensuring a smooth transformation of China's growth model toward a more inclusive economy that is focused on improving people's livelihoods. A successful reform and liberalization of the financial sector would boost household income, lessen both corporate and household savings, improve the efficiency of investment, and mitigate the risk of asset bubbles. A roadmap for reform should include a strengthening of the monetary policy framework, improvements in the regulatory, supervision and financial stability framework, development of the financial markets, deregulating loan and deposit interest rates, and eventually moving to an open capital account with the renminbi as a fully convertible currency.

"The discussion and analysis undertaken for the upcoming spillover report for China put in context why the agenda to transform the country's economic growth model is so important to the rest of the world. The positive outward spillovers from China will contribute significantly toward a strong, sustained, and balanced global growth if economic transformation is managed successfully. However, if that process moves too slowly, and stresses from the current policy framework cause disruptions, then the world will have to cope with a shock from a country with a central position in the world trading system."