Press Release No. 16/277

Press Release: IMF Staff Completes 2016 Article IV Mission to China

June 14, 2016

Webcast of the press briefing

A mission from the International Monetary Fund (IMF), led by Mr. James Daniel, Assistant Director of the Asia and Pacific Department, visited Beijing, Shanghai and Inner Mongolia from June 1 to 14 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 to exchange views on economic prospects, reforms progress and challenges, and policy responses.

The IMF's First Deputy Managing Director, Mr. David Lipton, joined the final policy discussions and met with Vice Premier Ma Kai, People’s Bank of China Governor Zhou Xiaochuan, Director of the Office of the Leading Group on Economic and Financial Affairs Liu He, Minister of Finance Lou Jiwei, China Banking Regulatory Commission Chairman Shang Fulin and China Securities Regulatory Commission Chairman Liu Shiyu, among other senior officials.

At the end of the visit, Mr. Lipton made the following remarks:

“China continues its transition to a sustainable growth path and is making progress on many dimensions of rebalancing. The success of this transition, while difficult and bumpy at times as we have witnessed over the past year, is crucial for China and the rest of the world. Our discussions this week in Beijing focused on the policies needed for achieving the transition and the urgency of implementing such policies.

“The Chinese authorities are fully aware of the challenges they face and have made clear, including in various policy announcements and the latest 5-year plan, their intent to transform China’s economy to a ‘new normal’. Their strategy rightly aims at boosting consumption, expanding the service sector, protecting the environment, further opening up the economy, expanding public services, reducing poverty, and carrying forward state-owned enterprise (SOE) reforms. Overall, reforms across a spectrum of key areas have advanced impressively. Yet progress has also been uneven. We see significant advances on switching from industry to services, but less on tackling credit growth; and there has been substantial liberalization of financial markets but less improvement in governance and hardening SOE budget constraints. As a result, vulnerabilities are still rising and the buffers to deal with shocks are eroding. This calls for more urgency in the implementation of reforms.

“The near-term growth outlook has turned more buoyant due to recent policy support. The medium-term outlook, however, is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector.

“Addressing these vulnerabilities and ensuring the transition to more robust, sustainable, medium-term growth requires decisively implementing a pro-active and comprehensive policy package in a number of areas.

“Corporate debt, though still manageable, is high and rising fast. Addressing the corporate debt problem is imperative to avoid serious problems down the road. A comprehensive plan and concrete actions are needed to harden budget constraints, especially on SOEs, restructure or liquidate weak firms, recognize and allocate losses, address the associated social costs, and facilitate market entry. Given the wide-ranging challenges involved in addressing these issues, we see merit in establishing a well-staffed group with a clear mandate to promote and implement practical restructurings of SOEs and to address the associated banking consequences, building on the plans for the coal and steel sectors already underway.

“The moderate slowdown in growth is a natural result of China’s necessary transition. Macro policies should be consistent with lowering vulnerabilities and allowing growth to settle at a sustainable level—around 6 percent in 2017. Credit growth needs to slow substantially to stabilize the credit/GDP ratio. Off-budget investment spending should be switched to on-budget measures that support rebalancing and reforms. Key fiscal reforms will include aligning local government revenue and spending responsibilities, expanding social security, implementing the new budget law and modernizing the tax system to make it more progressive. Substantially raising taxes on fossil fuel and pollution (e.g., a carbon or coal tax) would also help make growth greener and raise revenue. Set at an appropriate rate, for example, a tax on coal would significantly reduce local air pollution and could prevent 4-5 million premature deaths by 2030.

“Guarding against risks in the increasingly complex financial system requires action on multiple fronts. We see a clear need to address this issue in a more coordinated manner across regulators and markets. Specific actions that can be taken include boosting bank buffers, proactively recognizing potential losses, and strengthening funding resilience for both bank and other financial institutions. Efforts to rein in risks in the proliferation of shadow products should continue.

“The renminbi exchange rate is becoming more flexible and market-based, following changes introduced since last year. The mission encourages the authorities to continue this progress, with a goal of achieving an effective float within the next couple of years. While the external position remains moderately stronger compared to the level consistent with medium-term fundamentals, the renminbi is assessed as broadly in line with fundamentals, similar to our assessment in last year’s Article 4 consultation.

“The Chinese authorities have made progress in improving data and communicating policies to markets and the public. We encourage the authorities to continue their efforts to bridge the remaining substantial data gaps particularly on national accounts and government finances. Communications should play a more important role in clarifying the authorities ’policy intentions, reducing uncertainties, and aligning expectations. Continued and improved efforts in this area will help China manage the historic transition underway.

“China stands at a crucial juncture in its development path. Given its record of successful reforms over the past 3 ½ decades, and the authorities’ strong commitment to their ambitious reform agenda, we are confident that China will, once again, find its way through the challenges ahead, and we wish them the best of success in their efforts.

“We would also like to express our sincere appreciation to the Chinese authorities for their hospitality and productive discussions in the last two weeks.”