CHINA'S GDP UP TO 6.9%

IMF - On July 18, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with China.

The Chinese economy continues to perform strongly. GDP growth accelerated to 6.9 percent in 2017, driven by a cyclical rebound in global trade. Growth is projected to weaken slightly to 6.6 percent in 2018 owing to the lagged effect of financial regulatory tightening and the softening of external demand. Headline inflation has remained contained at around 2 percent and is expected to rise gradually to 2½ percent.

Reforms progressed in several key areas. A wide range of regulatory reforms reduced financial sector risks, overcapacity reduction progressed, anti-pollution efforts intensified and opening-up accelerated recently.

Credit growth slowed significantly, but remained strong. While the corporate debt to GDP ratio stabilized, total nonfinancial sector debt still rose faster than nominal GDP growth. The deficit of the general government sector (including estimated off-budget investment spending) was estimated to be around 11 percent of GDP in 2017.

The current account surplus fell by 0.4 percentage points to 1.4 percent of GDP in 2017. It is projected to narrow to 0.9 percent of GDP in 2018, driven by deteriorating terms of trade. Net capital outflows declined sharply from $646 billion in 2016 to $73 billion in 2017. The RMB was broadly stable against the basket of currencies in 2017 and was assessed to be broadly in line with fundamentals.

Executive Board Assessment

Executive Directors welcomed the authorities' strategy to decisively shift the policy focus from high-speed to high-quality growth, and commended recent reform progress, in particular, financial de-risking measures and continued opening-up of the economy. They noted that China's growth outlook remains strong and saw this as an opportunity to accelerate rebalancing and other reform efforts, building on the existing agenda.

Directors stressed the importance of staying the course on reining in credit growth. They underscored that the tightening of macro-financial policies should continue while de-emphasizing growth targets. They concurred that continuing financial regulatory reforms, curbing household borrowing, and reining in off-budget local government investment would help deliver a more sustainable growth path.

Directors welcomed the progress in rebalancing the current account, although they noted that some other aspects of rebalancing slowed. They emphasized that progress should be accelerated by more decisive structural reforms to support consumption and reduce income inequality and pollution. In this regard, they looked forward to the authorities' plans to increase social spending and reform pensions. They noted that a more holistic policy framework would help address the tensions across rebalancing dimensions.

Directors agreed that market forces should be allowed to play a more decisive role. In particular, they stressed the need to reduce the dominance of the public sector in some industries, continue to advance state-owned enterprise reforms, open up more markets to the private sector, and ensure fair competition.

Directors welcomed the authorities' strong commitment to free trade and multilateralism. They saw the recently announced package of opening-up policies as being in the right direction and urged the authorities to accelerate reforms in this area. They underscored that trade tensions should be resolved in ways that support and strengthen the international trading system and the global economy.

Directors agreed that further improvements in policy frameworks are needed to implement the authorities' high-quality growth agenda. They supported continuing financial regulatory reforms, a more price-based monetary policy framework, and addressing the misalignment of center-local fiscal responsibilities. In this connection, they welcomed the progress in implementing the FSAP recommendations. Directors also stressed the importance of addressing gaps in China's macroeconomic data. Directors concurred that the success of the Belt and Road Initiative would be enhanced by an overarching framework, better coordination and oversight, more open procurement, and due attention to debt sustainability in partner countries.

Directors took note of the staff's assessment that the renminbi remains broadly in line with fundamentals even as the external position in 2017 was moderately stronger than implied by fundamentals. They welcomed the increase in the flexibility of China's exchange rate, which should continue. Directors concurred that reforms to support the continued easing and removal of capital flow measures and further capital account liberalization should be expedited.

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Earlier: 

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