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The market is divided over the economy’s real strength.
The market is divided over the economy’s real strength.

Don’t Be Too Optimistic About China, IMF Says

Don’t Be Too Optimistic About China, IMF Says

China’s growth prospects may be higher but it’s a bit too optimistic to suggest the world’s second-biggest economy is entering a new cycle of expansion, the International Monetary Fund’s chief in China said.
The caution over the country’s economic prospects came a week after the Washington-based fund revised up China’s average annual growth forecast from 6% to 6.4% for 2018-2020, Xinhua reported.
“We would be a little bit more cautious on the (new cycle) statement because some of the tightening coming from the financial sector should have a decelerating impact on economy,” Alfred Schipke, IMF senior resident representative in China, said in Beijing on Thursday.
“When the real estate sector does not perform as strongly as it did in the past, that would probably have an impact on the growth outlook.”
China’s stronger-than-expected economic growth in the first half and the steady appreciation of the yuan against the US dollar has dispelled bearish views among various banks and institutions, including the IMF, prompting them to revise up their forecasts for China.
At the same time, the market is divided over the economy’s real strength and just how much industrial profitability can improve.
One of the biggest debates among Chinese economists is whether China has bid farewell to overcapacity and entered a new phase of growth.
Schipke said China’s economic resilience was underpinned by a booming property sector and greater demand for Chinese products abroad, but both could lose steam down the road. “I am careful to say that we are at the beginning of an upside (in growth),” he said.
Earlier this month, the IMF warned that growth might lead to more debt, forecasting non-financial sector debt to amount to over 290% of GDP by 2020, up from 235% last year.
It said China needed to address deeper challenges, such as excessive savings, a bloated state sector, persistent overcapacity, elevated corporate debt, financial sector fragility and the hesitation to liberalize the exchange rate and capital account.
The economy is already showing signs of softness, with all major economic gauges falling below expectations in July.
There are also concerns that the government’s reliance on administrative orders to push supply-side reform such as capacity cuts will backfire on the overall economy, such as squeezing out the private sector and exacerbating price volatility.
Citing its second-quarter survey of more than 2,000 industrial firms, the Cheung Kong Graduate School of Business said the industrial economy had not yet bottomed out because investment remained sluggish, and production and power consumption was flat.

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