Transcript

Press Briefing 2021 China Article IV

January 28, 2022

Moderator:

TING YAN

Press Officer, Communications Department

IMF

Speakers:

HELGE BERGER

Mission Chief for China and Assistant Director of the Asia and Pacific Department

KRISHNA SRINIVASAN

Deputy Director of the Asian Pacific Department

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T R A N S C R I P T

MS. YAN: Good morning, everyone and good evening to those who join us from China and other parts of Asia. Thank you for joining this press briefing on the 2021 China Article IV Staff Report. My name is Ting Yan, press officer at the IMF. I'm glad to be joined by our two speakers today. We have Helge Berger, Mission Chief for China and Assistant Director of the Asia and Pacific Department. And also, Krishna Srinivasan, Deputy Director of the Asian Pacific Department.

You should have all received the embargoed China Article IV Staff Report and hope you have already had a chance to read it. I'd like to remind you that the report and this briefing are both under embargo until Friday, January 28th at 3 a.m. Washington, D.C. time which will be 4 p.m. Friday, Beijing time.

Helge will start with an overview of the report to highlight a few key messages of the report and then we will be open for your questions. Helge.

MR. BERGER: Thanks Ting, and good morning, everyone. This will be really, really short just to help those who didn't have time to read through the report. It's a lengthy one and has lots of details and so looking forward to your questions afterwards. So just three key messages I would like to stress.

First, the Chinese economy is slowing down. Macroeconomic policy should adjust to protect growth. Monetary policy, as you have seen, has already moved in the right direction with the policy rate reductions of recent days. But fiscal policy is still in consolidation mode and subtracting from growth. We recommend instead fiscal policy take a neutral fiscal stance in 2022.

Second, rebalancing the economy away from investment and towards consumption will not only secure high quality growth but also bring China closer to reaching its ambitious climate goals. This is because consumption, as a rule, is less carbon intensive than investment, and you’ll find a lot of detail on our recommended strategy in the report.

So to achieve this, to turn the economy towards consumption led growth, fiscal policy should support low-income households now and at the same time, set the stage for improving China's social protection system going forward.

Third, China has a productivity problem. Aggregate productivity growth has dropped dramatically reaching just 0.7 percent aggregate total factor productivity growth per year on average in the last 10 years. This contrasts with 3.5 percent growth of TFP in the 10 years prior.

So clearly, this is a dramatic reduction in productivity support for growth and it comes at a time when the Chinese workforce has stopped growing. Here we recommend to reaccelerate SOE reform and to make sure that the conditions are in place for private firms to compete with state-owned enterprises on an equal footing. That's known as competitive neutrality reforms. That's it. Otherwise, happy to take your questions.

MS. YAN: Thank you, Helge, and now we're happy to take your questions. You can use the raise hand function in Webex or you can also let me know. You can also type your questions in the chat box. Anyone has a question? If you have a question, please raise hands. Okay we have a question from Qingting Zheng from 21st Century Business Herald in China. So her question is, would rising U.S. rates put pressure on capital outflows from China and RMB exchange rate.

MR. BERGER: Okay Krishna, do you want to take that?

MR. SRINIVASAN: Yeah, I can take that. So in response to the question, I would say that broadly speaking we think the impact would be small. And that's, you know, it goes without saying that interest rate movements are a key determinant of national flows. But in the case of China, the capital account is still mostly closed and main determiners of flows and the RMB have created structural inflows which is in the industries and so on.

So given the fact that that the capital account is largely closed and these flows are relatively slow, we don’t see a big impact. Now in this context, that given where China is in terms where, you know, Helge mentioned the economy is slowing and so on. And inflation being low and slack in the economy, monetary policy should remain accommodative focusing on interest rate-based measures to keep debt servicing costs low. And in this context, we welcome the recent reduction in policy borrowing costs and sent investment towards aggregated policy so thank you.

MS. YAN: Thank you. Tom Hancock from Bloomberg. Tom, would you like to ask a question? So his question is on the IMF's suggestions for property policies in 2022. Tom, would you like to elaborate on your question?

QUESTIONER: Yeah, obviously we've seen some easing on the property restrictions that have had a massive effect on China's economy last year. So, know you, we've seen gradual easing. Is it the IMF's view that authorities need to go further with the housing with easing up on the housing financing and other restrictions? And, you know, does that need to happen quicker than other risks of a sharper correction in property kind of looming and so action needs to be taken as soon as possible.

MR. SRINIVASAN: Maybe I should take that. Tom, that's a good question. Again, as you're aware, the property and real estate sector plays a large role in China's economy and financial system. And currently, we see significant stress in this sector with many developers facing serious financial strains starting with Evergrande which spilled over to other developers and so on.

And the risk of contagion into the broader economy is very pertinent. You know, in addition to the effect on consumption investment, you know, those effects will spill over into the domestic financial system and especially will also spill over into the rest of the world.

So the risk of contagion is very much a footprint and important to guard against systemic contagion. Now but, you know, as we reveal later in the report, the government has the tools to address these risks. In the short term what we emphasize is that you have to intensify the surveillance of developers and lenders. You've got to assess the pressure points and to see what are the inter linkages and so on. So it's very important to intensify monitoring of risks.

Second, you have to strengthen central government coordination policy responses. As we've said in the report, policy response so far has been somewhat piecemeal and so that speaks to the coordination and better communication of these polices. I think that's very, very important.

Third, we would say we noted in the short term that you have to ensure timely completion of pre-sold housing. So that's something which can build confidence and so on so it's very important to get that done. And finally, we said in the short term, it's important to facilitate a swift restructuring of public developments. And, you know, you hear when you have a problem in sector that things could -- may not be a sufficient differentiation between the good and the bad and so on. So it's important to make sure that the troubled developers you have a restructuring plan and then for the ones which are viable, provide liquidity support and so on. So that's important. All these are important in the short run.

And where, if necessary, I think the government should stand ready to provide more macro support are going beyond the short term and over the long term, I think what's important is the government needs to strengthen macroprudential and real estate policies. And, you know, that should be aimed at limiting demand which we've seen in some other countries moving risks from pre-sale practices which you have seen quite prominently in China and improve surveillance risk management.

And beyond that, you know, you'd need to continue strengthening bankruptcy processes for non-financial corporates. So these are the kind of policy prescriptions we have to address the property sector. Happy to elaborate on these or, you know, Helge may want to add to that. Thank you.

MR. BERGER: No, I think that was spot on.

MS. YAN: Thank you. We have a question from Youyou Wang Phoenix TV. Youyou, please go ahead.

QUESTIONER: Can you hear me?

MS. YAN: Yes.

QUESTIONER: Hi. I'm just wondering, there was an article published by the IMF warning the risks that the Fed's policy change will have on emerging markets. And what's the risks for China from the Fed's policy change recently and maybe going forward in March?

MR. SRINIVASAN: Again, I think I responded to this question earlier. But broadly speaking the impact, we think the impact will be small and that's largely because, you know, despite the fact that interest rate movements do affect financial flows, in the case of China, the capital account is still mostly closed. And given the fact that volume of flows is small and the fact that the capital account is relatively closed, we don’t see a big impact from effect tightening of interest rates.

Again, the two countries, China and U.S. are on different cyclical positions. So what we emphasize in our report is that monetary policy in China should remain accommodative in 2022 especially given low inflation and slack economy. And in that context, we welcome the recent measures would ease policy rates, the lower boring costs and strengthen investment. Thank you.

MS. YAN: Thank you. Do we have more questions.

MR. BERGER: I think there is one in the chat on COVID strategies. I can take this.

MS. YAN: Okay.

MR. BERGER: Let me just read it out loud for everybody. So Greg is asking, what about the zero COVID policy. Is this another form of policy tightness that is slowing economic growth. Good one. So I think to answer this, it's important to step back just a little bit and look at what these zero COVID polices actually were and what they did in 2020 and 2021.

I think most people would agree that this approach has helped the country and served the country well and by extension also helped the global recovery. What it meant was, you know, moving in quickly to contain outbreaks at the local level and also shifting healthcare resources which, as in any country, are scarce, to the places where they're most needed.

What has changed then recently, roughly since last summer, is that the outbreaks have become more frequent, therefore the lockdowns have become more frequent. And this is, you know, interesting and important to note that this makes a difference for economic performance as well even though the case numbers are low. That's because with the more frequent outbreaks, we also have more containment measures.

Now these containment measures over time have become more targeted and therefore a little less disruptive. But in our analysis, they did have an impact on consumption and one that continues into this year. So because we have no reason to expect that these outbreaks will become any less frequent in 2022, this is one of the big reasons why we have lowered our forecast for the year; the other one being the weakness in real estate investment, something Krishna just discussed.

So going forward, we think that China, like all countries, will need to think about how to best calibrate its COVID policies to this changing nature of the disease and new variants and their transmissibility and so on. So it's important that China looks at all policy options that it has and one obviously is to continue to fine tune these lockdown measures to make them less disruptive going forward.

Another one is to make sure that effective vaccines are available to boost the resiliency of the population. This is not unique to China but it is, of course part of the challenge that policymakers are facing in 2022.

MS. YAN: Thank you, Helge. We also received the same question from Qingting Zheng of 21st Century Business. So she's asking do you assess the impact of China's zero COVID policy on its economy?

MR. BERGER: Same question, same answer. Yes, it's a factor for the downgrade but I just discussed what the policymakers can do.

MS. YAN: So do we have more questions? Let me check.

QUESTIONER: Can you hear?

MS. YAN: Yes.

QUESTIONER: Hi, thank you. I actually have a question going back to a previous report, but this is a chance to ask it. When China cancelled its big IPO over the whole Jack Ma business in November of 2020, the IMF was doing, was engaged in its chapter, in its Article IV consultation while that decision was made. Was IMF's advice in any way part of that? In other words, it's been attributed largely to Chinese communist party disapproving of critical comments made by Jack Ma. But what I'm asking is was there a further dimension to it in which the IMF consultation might have figured and considerations of policy not political but economic. Thank you.

MR. BERGER: Not that we are aware of. So no. But of course I can speak to the policies that then unfolded going forward. So we had seen, if you wish, a tightening of regulation, especially around the technology sector. And what you will see in our report this year is that this has added to what we call policy uncertainty for the sector more broadly.

So we have firms worrying about or, you know, at least thinking about what the next steps of regulators are. Our view is that technological regulation or regulation of the sector more broadly is not necessarily a bad thing. It's a good thing to think about fair competition and to improve consumer protection of course.

However, it's also crucial to go about this in a transparent and a predictable manner to preserve sort of the efficient operation of the market. I think that is the headline here. More detail is in the report if you have time to look at it.

QUESTIONER: Okay. And a follow up if I might and this is involving the effect on China's economy of the dramatic increase in censorship in Hong Kong over the past year. Hong Kong having been an important for information, free exchange of debate, ideas and so on, effecting among other things the economy. Is it likely that that is going to now -- is now already or is going to make a difference in the performance of China's economy.

A lot of people have raised this but I'm not really hearing it. I'm hearing a gap between the discussion that goes on in the daily press and the ways that China's economy is addressed by people who look at the fundamentals. And so it's a serious question and I want to know in your estimation or in the IMF's estimation, does this matter? They’ve effectively closed off to themselves a place that was a very important sort of access and exit point for all sorts of more direct connections with China.

MR. BERGER: Yeah. I would just note that the Hong Kong Article IV mission just ended so we're finalizing the report on this. I think I would point to this report when it's ready to discuss this. There's a general aspect to how any country, including China, is handling its market economy and we addressed some of this just now. We talked about your first question. I think that's as far as we can go from a China perspective. Krishna, I don’t know whether you have anything to add.

MR. SRINIVASAN: Just wait for the Hong Kong staff report to come out. We can talk about it at that point in time. At this point, let's just wait for that.

QUESTIONER: I'm not asking with regard to Hong Kong. I'm asking with regard to China. In other words, China has made a tradeoff there and cut off itself from what was a probably more accurate source of information then it now allows in Hong Kong. So I'm not asking about Hong Kong, I'm asking about the effect on the economy of mainland China, the one you're concerned with in this report.

MR. BERGER: Same answer. I think we want to wait until the analysis for Hong Kong is complete to discuss this.

QUESTIONER: Thank you.

MS. YAN: Thank you. We have a question from Yifan Xu, China Daily. Yifan, do you want to ask the question? So I can read the question if you want. Her question is, as the IMF cuts the 2022 global growth forecast because of the U.S. and China recovery wanes, what is the most significant area both sides should cooperate to change the trend? For example, the supply chain or others.

MR. BERGER: I'm happy to reply to this. So first off, the reason why we have downgraded both the forecast for 2020 United States growth and 2020 China growth are quite different. For China, we already discussed this. This has to do with real estate investment weakness, with a delayed recovery in consumption which is still lagging other GDP components in its return to pre-crisis trends.

For the U.S., it's a different matter having to do in particular with U.S. fiscal policy. So that said, of course both countries are also in an economic relationship and what you have heard us discuss in the past, and you'll find this again in the report, is that a decoupling between the two economies in terms of trade, especially in the technology area, in terms of foreign direct investment, again, especially in the technology area, is something that potentially will hurt both economies.

And for China, this unfortunately adds to the headwinds in terms of productivity growth which as you heard me say at the outset has been slowing down and that is one of the main problems we see to securing high quality growth in China into the future. And so, our recommendations is for both of these economies to solve any issues that arise in terms of trade, FDI, including in the technology sector, jointly, do it within the well-established multilateral rule-based trading system. That has the potential to not only advance the system which, of course, has to change with the changing nature of the global economy and trade but also will benefit both economies tremendously.

MS. YAN: Thank you. We also have a question from Irene Zhou. Irene, please go ahead.

QUESTIONER: Hi, this is Irene. I've also got a question about China's economy. Because I remember according to your press release published last November when IMF just finished your consultation with China's regulators. I think IMF suggest China to implement more expansionary, monetary and fiscal policy. So after that, a triple arc happened following by another MLF cut and two LPR cuts.

However, most people think that the moves come too late and it's very hard to build up the economy when the deflationary pressures mount due to zero COVID policy and also the housing market policy. So at this moment, what is IMF's, you know, policy advice for Chinese government to, you know, to further build up the economy in 2022 and beyond, because the downward pressure is still very big. Thank you.

MR. BERGER: No, we would agree with you. We also see downward momentum in growth and this is what is behind our reduction in the 2022 forecast. However, of course the actual outcome of growth this year is a function of how macroeconomic policy will adjust. We have seen on the monetary policy side, a series of measures that have moved monetary policy towards more support of the economy and you have listed some of these. And we think that particularly the recent policy rate cuts and the ensuing LPR adjustments have been very helpful. Interest rate based policy is very powerful and these are important steps.

Where our concern is that fiscal policy still is very much in consolidation mode. It is not, as far as we understand, that fiscal claims for this year is as aggressively tightening the fiscal belts as it did in 2021. But it's still set to tighten the fiscal belt in 2022. And as far as we are concerned, it would be preferrable if fiscal policy had a neutral stance that would stop subtracting from growth this year.

This will help stabilize growth momentum and given where the output gap is -- a large gap still between where demand is and supply in the Chinese economy, as evidenced in low inflationary pressures at the consumer side -- that is the right way to go. And I think policy makers will need to be on the lookout for growth momentum potentially becoming worse which, of course, would then make for an even more urgent need for supportive fiscal policy especially.

On the fiscal side, I think it's also important to think about how you actually deliver support to the economy. It's one thing to stop consolidating at the aggregate basis. It's another thing to think about how the mix of tax and spending measures should be targeted. Currently, most of the fiscal support is focused on supporting investment. And while this can be good sometimes, in other times this is less helpful and currently with the weakness in consumption that you rightly pointed out, we would think it would be very important to tailor fiscal policy towards the support of households.

In the short term, this means providing support to low-income households which have a tendency to spend their income because they tend to be operating in a tight budget. Longer term, you can think about and I think you ought to be thinking about the social protection system in China which still has significant gaps. Think about social insurance, medical benefits for one, and unemployment insurance where there are important gaps in terms of coverage but also in terms of adequacy.

Social assistance is another issue. Pension reform can also be brought forward. Supporting pensions for those who have retired and making sure the system is financially viable to make the system credible. All of this will help longer term to reduce the savings rate of households in China. The savings rate in China is very, very high by the country's income standards. Other countries in the same income range have much lower savings rates.

And so, lowering this by giving households certainty about their income as the government providing social insurance in the larger sense will allow them to consume more. This will help shifting the economy towards a more consumption based growth path going forward which has all sorts of benefits in addition to helping in the short term to stabilize growth at this moment.

QUESTIONER: Thank you. And just a very short follow up, do you have any further comment on China' RMB? I mean the exchange rate. Because last year, we had seen robust growth of RMB because of the very strong capital inflows and very big current account surplus due to the very resilient exports. Which we can see the continue maybe go into 2022 but the POC seem reluctant to see RMB go any stronger. what is IMF's advice for China and also the advice on the exchange rate reform? Thank you.

MR. BERGER: Krishna, I can start. You can start whenever you prefer.

MR. SRINIVASAN: Please go ahead, Helge.

MR. BERGER: Okay thanks. Super question. So, you know, when we looked back at last year at the entire pandemic episode which unfortunately still continues, we would note that the Renminbi has moved quite strongly in concert with the changing relative macroeconomic position of China.

So early on in the pandemic, you'll remember that the Renminbi weakened. That was when China went into that large lockdown. The rest of the world hadn't yet met COVID and so that was the appropriate reaction of the exchange rate. Later on as China emerged from the great lockdown, the disease affected the rest of the world, the opposite happened as the Renminbi appreciated.

So in general, we would see that the exchange rate has been doing what exchange rates are supposed to do, that is, serve as a buffer, you know, adjusting relative prices between economies in a way that helps everyone. So we would encourage the Chinese authorities to continue to support exchange rate flexibility going forward. There is definitely still room to do this.

As you know, China, a big economy that is important to the world, still has a relatively closed capital account. It still doesn't have full coverage ability of the Renminbi and making granule progress in this direction is clearly to the benefit of everyone. We're positive that policy makers have this firmly on their agenda.

MS. YAN: Zhiwei from People's Daily. Please go ahead.

QUESTIONER: Hello? I want to ask a question about the climate change. In the report you had mentioned China is doing something in the climate change. So could you introduce something about this sector? Thank you.

MR. BERGER: Finally somebody asked about climate. Yeah, that was an important part of the report as well. We discussed that China has put out very ambitious goals to reduce its carbon output in line with its commitment as put on paper in the Paris Agreement.

We note that the implementation of these plans are very important going forward. So you have to step from setting ambitious goals to implementing them. And we also discussed that we see the authorities getting ready to actually make this step from goals to implementation.

Now our recommendation in the report is to do this in a way that minimizes any tradeoffs between achieving the climate goals and growth. And there are a number of steps China can take to ensure that this is actually happening. One is to make sure that the agenda on rebalancing which we discussed earlier, so making growth more consumption based, proceeds swiftly. And if you do this, you earn a double dividend in the sense that you'll make growth in China more consumption oriented, that is, more high quality, which is we understand one of the goals of China's policy makers. And at the same time because consumption of services, consumption of goods tends to produce less carbon than investment linked growth, you will also help China to achieve its climate goals more efficiently. Indeed, we have done a calculation in the report that says that rebalancing can get China 15 percent closer to achieving its climate goals than not doing it.

So it's clearly an important pillar in our view of how China can effectively implement its climate targets. Using price tools mainly the emissions trading system in China is another important step here. The system is in place, it's operating nationally but it can be strengthened significantly by making sure that firms pay for the allocation of CO2 emission rights and that the price is actually turned into changes of investment decisions.

So that speaks to how the power sector is organized and there is clearly reform potential there. I would also say that there are various market based reforms that policy makers can put into place in other sectors of the economy that will help here.

So finally, as we described in the report, there is a lot that China can add to the ongoing expansion of green finance which will help this whole endeavor greatly. So: ambitious goals, implementation is the next step, and there are things China can do to help.

Maybe one additional point here which I should have listed with the others. There is also a question of how ambitious you are in achieving your goals early on. So this is a long term goal China wants to be climate neutral by 2060. But the more effort, the more reforms you do early on, the easier it will get overall and the more affordable it will get, with smaller tradeoffs with growth overall. So add this to the list that I made in terms of what would be good ideas in implementing the climate goal.

MS. YAN: Thank you, Helge. Again, if you have a question, please raise your hand or type your questions in the chat box. I think we have a question from Gao Pan, Xinhua News Agency. Pan, please go ahead.

QUESTIONER: Thank you for doing the briefing. You know China has its own central bank digital currencies. Could you comment on the progress that China has made in this area. And do you think the move to promote central bank digital currency would help to boost the Renminbi as a reserve currency in the global financial system. Thank you.

MR. BERGER: Thank you very much. That too is discussed in the report but let me give you the highlights of the coverage here. So China is indeed one of the many central banks on the planet that are currently experimenting with CBDCs. It's fairly advanced. As you are well aware, there are a number of pilots in place that study the use of it, the Olympics being part of that.

There are also some experiments ongoing in the cross border use of the Renminbi together with other central banks. So this is indeed a field where there is a lot of activity in China. In terms of what an electronic Renminbi will do for the international use of the Renminbi, I would say the determinants of the importance of the currency are the same as before the event of the e-CNY. The international use is determined by which currency trade deals are concluded in. They are determined by how investors see the ability to move in and out of a currency area.

So the basic fundamentals that always determine the use of the currency in an international domain are basically unchanged. So as long as China's capital account is predominantly closed, as long as there are strict limits on the convertibility of the Renminbi, as long as other countries in the world sort of dominate trade contracts in terms of currencies, you know, China's role in the Renminbi will not change by much. So it's down to the fundamentals and it's unclear at this point whether the ECNI will make a large difference there.

MS. YAN: Thank you again for joining this press briefing and a reminder that this briefing as well as the staff report of China Article IV are embargoed until 3 a.m. Washington, D.C. time, 4 p.m. Beijing time Friday. Thank you all and happy lunar new year to those who celebrate it.