Washington DC, August 2, 2024
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the People’s Republic of China on July 19, 2024.
China’s economy has remained resilient despite the continued weakness in the property sector, with GDP growing by 5.2 percent in 2023, and 5 percent y/y in the first half of 2024. Growth has been primarily driven by strong public investment and the post-COVID recovery in private consumption, with net exports also providing a boost more recently. However, inflation has been low in recent quarters amid continued economic slack.
Looking ahead, growth is projected to be broadly in line with the government’s target in 2024, and inflation is expected to pick up gradually as the output gap closes and the impact of lower commodity prices wanes. Over the medium term, growth is projected to gradually decline to about 3.3 percent in 2029 amid headwinds from weak productivity and an aging population.
Uncertainty surrounding the outlook is high. Deeper-than-expected contraction in the property sector, combined with high debt levels, could result in sustained disinflationary pressures and adverse macro-financial feedback loops. External risks include greater-than-expected weakening of external demand, and an escalation of fragmentation pressures. On the upside, decisive policy action to facilitate adjustment in the property sector or market-oriented structural reforms could boost confidence and lead to a better-than-expected economic outcomes.
Executive Board Assessment[2]
Executive Directors welcomed China’s resilient growth and the post‑pandemic recovery in private consumption. Nonetheless, Directors emphasized downside risks from the ongoing adjustment in the property market and the drag from local government debt. In that context, they concurred that macroeconomic policies should support domestic demand in the short term. Directors also noted that a balanced policy approach and pro‑market structural reforms would be necessary to foster high‑quality, green growth in the medium term.
Directors welcomed the authorities’ ongoing efforts to facilitate the property sector adjustment and boost homebuyers’ confidence. They generally underscored the need for a comprehensive policy package to facilitate a more efficient and less costly transition for the sector. In that respect, Directors called for the timely exit of nonviable property developers and greater house price flexibility. Most Directors also saw scope in the deployment of central government financing to protect homebuyers of unfinished housing, while some noted the associated fiscal costs and the moral hazard implications.
Directors agreed that a neutral structural fiscal stance in 2024 would help restore consumer confidence and support domestic demand while mitigating downside risks. The positive effects would be stronger with a reorientation of expenditure away from investment and toward households through an expanded social protection system, including greater transfers to vulnerable segments, and a more progressive tax regime. A gradual decline in the structural fiscal deficit can begin in 2025, with a pace dependent on the strength of the recovery, inflation developments, and property market outlook.
Directors emphasized that stabilizing public debt will require sustained fiscal consolidation in the longer term, achieved through a reduction of off‑budget investment and wide‑ranging tax and social security reforms. They highlighted the need for fiscal framework reforms, including improving monitoring of local government finances, reducing their structural expenditure‑revenue gaps, and establishing subnational fiscal rules. Directors noted that reducing the debt stock of local government financing vehicles would require greater use of insolvency tools.
Directors welcomed the People’s Bank of China’s monetary policy response and encouraged additional monetary easing via interest rates to boost domestic demand and further mitigate deflation risks. Greater exchange rate flexibility would also help absorb external shocks.
Directors positively noted the significant changes to China’s financial regulatory and supervisory architecture to enhance risk mitigation. They observed that financial stability risks remain elevated and called for reducing asset quality risks by phasing out forbearance measures and strictly applying prudential policies. They underscored the importance of reforms to tackle legacy vulnerabilities in the financial system, including the need to devise a comprehensive strategy to strengthen small and medium banks, upgrade crisis management and bank resolution frameworks, and enhance systemic risk oversight. Continuing to strengthen the AML/CFT framework is also important.
Directors emphasized the need for greener and more balanced growth. They underscored the importance of continued efforts to rebalance demand toward consumption together with reforms that boost the potential of the service sector as a growth driver, including by reducing regulatory barriers. Other key reform priorities include implementing SOE reforms, gradually increasing the retirement age, and strengthening labor market policies. Directors welcomed China’s decarbonization efforts and its success in deploying renewable energy. They urged accelerating power sector reforms, including reforms to the emission trading system.
Directors positively noted that China is a key player in addressing global challenges and welcomed its constructive role in supporting sovereign debt restructuring in low‑income and vulnerable countries and tackling the global climate crisis. They also emphasized China’s important role in strengthening the multilateral trading system in close collaboration with international partners. In that context, Directors generally agreed that scaling back China’s industrial policies, which should only be used in the presence of well‑defined market failures, and improving transparency around government support could help reduce domestic resource misallocation, lessen fragmentation pressures, and mitigate international spillovers.
Directors agreed that addressing remaining data gaps would help enhance data transparency and strengthen policy making.
Source – EU Commission