China's near-term growth outlook has improved due to recent policy support but the country needs to rein in fast credit growth to ensure economic transition on a sustainable footing, the International Monetary Fund said.
The Chinese economy is expected to grow 6.6% this year, with the inflation rate rising to 2%, the IMF said in a report after concluding its annual economic health check on the Chinese economy, Xinhua reported.
"We have a positive view of China's growth outlook as China continues to mobilize its very considerable resources and catches up with higher-income economies," said James Daniel, IMF mission chief for China.
The IMF expected that China's economic transition will continue and will be positive overall for the global economy.
According to the report, China's internal and external imbalance is expected to fall gradually due to aging and a stronger social safety net. Household consumption is expected to continue to pick up on the back of falling household savings and rising disposable income.
The IMF report also noted that the Chinese currency, the renminbi, is broadly in line with fundamentals, and welcomed China's steps toward an effectively floating exchange rate region.
Despite the relatively benign near-term outlook, downside risks dominate, including rapid credit growth and slow progress on reform, said the IMF.
In order to reduce vulnerability, China's policy priority is to slow credit growth, which can be done by tackling its root causes: soft budget constraints on state-owned enterprises and local governments, and the implicit government guarantees and excessive risk taking in parts of the financial sector, said Daniel.
According to the IMF report, Chinese authorities agreed that China's corporate debt has risen excessively. But they pointed out that China's large pool of domestic savings, ample banking system buffers, and ongoing equity market development would facilitate a smooth adjustment.
Chinese authorities expected growth to remain in the range of 6 to 7%, which was sustainable considering the potential for restructuring, upgrading and convergence in less developed regions.
Liquidity Trap
China's lower-than-expected new yuan lending growth in July points to the need to make more efforts to boost private investment as the effectiveness of monetary stimulus declines, economists said.
Total social financing, or non-government borrowing, the broadest measure for credit and liquidity, hit 487.9 billion yuan ($73.4 billion) in July, far below market expectations, according to the People's Bank of China.
Two other main gauges of money supply continued to show a widened divergence, raising concerns over the possibility of China falling into the liquidity trap, a situation where money it pumps into the market fails to flow into the real economy.
The narrow measure of money supply, M1, which includes cash and demand deposits, increased by 25.4% in July year-on-year, while the broad measure of money supply that includes cash and all types of deposits, M2, grew by 10.2%.
It is too early to say that the nation has already fallen into the liquidity trap, but "the divergence is sounding an alarm bell", said Ying Xiwen, an economist at China Minsheng Securities Co.
Ying said the surging M1 is mainly caused by enterprises' decision to bank the money in their accounts when few good investment options are available.
"The government has to find solutions to lower the M1 growth, as business confidence remains in the doldrums," Ying said.
Wang Youxin, an economist at the Institute of International Finance, a think tank affiliated with the Bank of China, said that the government needs to ensure that small companies have easy access to financing at a time when large-scale state-owned companies tend to get loans more easily.
Wang suggested that as monetary stimulus becomes less effective, more fiscal measures, such as tax cuts, and targeted policies leading investment into some industries, such as high technology, would help decrease the gap.
Su Jian, an economics professor at Peking University, said the central bank does not have enough incentives to relax monetary policy, unless the bank thinks it would be helpful to stabilize market expectations.
