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IMF Maintains China’s 2018 GDP Growth Forecast at 6.6%

IMF’s David Lipton says the Chinese economy is performing well and reforms are making good progress and that it should achieve its goal of high-quality growth
Shenzhen’s private firms have driven China’s global leadership in frontier industries such as e-commerce, fintech and hi-tech consumer goods.Shenzhen’s private firms have driven China’s global leadership in frontier industries such as e-commerce, fintech and hi-tech consumer goods.

An International Monetary Fund team, led by James Daniel, assistant director of the Asia and Pacific Department, visited Beijing and Shenzhen from May 17 to 30, to conduct discussions on the annual Article IV review of the Chinese economy.

The mission held highly constructive and candid discussions with senior officials from the government, the People’s Bank of China, private sector representatives, and academics on economic prospects, reforms progress and challenges, and policy responses, IMF.org reported.

IMF First Deputy Managing Director David Lipton at the end of the visit issued the following statement:

“The Chinese economy is performing well and reforms are making good progress. Our discussions in the past two weeks focused on the authorities' development and reform agenda to achieve its goal of high-quality growth and the importance of accelerating reforms in key areas.

“Economic growth accelerated in 2017 for the first time since 2010, driven by a cyclical rebound in global trade. This strength is expected to weaken only slightly in 2018. Staff project full-year 2018 growth at 6.6% and to moderate gradually to about 5.5% by 2023.

“Reforms progressed in several key areas: financial sector de-risking accelerated, with a wide range of decisive measures adopted; credit growth slowed; overcapacity reduction progressed; anti-pollution efforts intensified; and opening up continued.

High-Quality Growth

"We welcome the authorities’ strategy to more decisively shift the policy focus from high-speed to high-quality growth. In particular, shifting from excessive, debt-financed investment to consumption will sustain growth in an environment of rising living standards, a cleaner environment, and much reduced risks. We very much support this focus and we encourage the authorities to persevere.

“To be an effective and credible leader of better globalization, China should continue to address the distortions that still beset its economy and affect cross-border trade and investment. China would benefit from exposing sheltered sectors and firms to more domestic and foreign competition, ensuring a level playing field, and better protecting intellectual property rights.

"We encourage all parties to work cooperatively toward deescalating trade tensions and to strengthen the multilateral trade and investment regime."

Achieving this goal of high-quality growth requires building on the existing reform agenda and taking advantage of the current growth and reform momentum to ‘fix the roof while the sun is shining’. In particular, this requires:

Following through on stated intentions to deemphasize growth targets and focus on high-quality growth. Rebalancing the economy will likely mean somewhat slower overall growth. This should not be resisted, for example, with credit-fueled investment stimulus—this would make the debt problem worse and undermine growth later on.

While credit growth has slowed, it still remains too fast. Slowing it further will require less public investment, tighter constraints on SOE borrowing, and curbing the rapid growth in household debt.

Opening Up Markets

Allowing market forces a more decisive role: This means reducing the dominance of the public sector in many industries, opening up more markets to the private sector, and ensuring fair competition. The importance of the private sector was reinforced by the IMF team’s visit to the dynamic and prosperous city of Shenzhen, where it has been private, not public, firms that have driven China’s global leadership in frontier industries such as e-commerce, fintech and hi-tech consumer goods.

China’s integration with the global economy over the last 40 years has lifted China from one of the poorest countries in the world to now an upper-middle-income country, and world’s second largest economy.  Yet China’s trade and investment regime remains relatively restrictive.

Faster opening up would not only support China’s own high-quality growth agenda, but also benefit the global economy. Recent efforts to defuse trade tensions are welcome and efforts should continue to seek a negotiated settlement that strengthens the global economy.

Modernizing Policy Frameworks

Financial sector reforms have made strong progress recently—this should be continued, for example, by ensuring the new institutional structure of financial supervisors is a success. Monetary policy should continue to become more price, rather than quantity, based, and the exchange rate should continue to become more flexible.

The central government should share more of local governments’ spending responsibilities while increasing their ability to raise their own revenues. Policymaking would also be improved by strengthening China’s relatively weak macroeconomic data.

“Given China’s record of successful reforms in the past decades, and the authorities’ strong commitment and determination, we are confident that China will rebalance to a sustainable growth model," Lipton concluded.

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