Transcript

Transcript of the Press Briefing on the 2023 China Article IV Consultation Mission

November 7, 2023

PARTICIPANTS:

Moderator:

TING YAN

Senior Press Officer, Communications Department

IMF

Speakers:

GITA GOPINATH

First Deputy Managing Director, IMF

THOMAS HELBLING

Deputy Director, Asia and Pacific Department, IMF

SONALI JAIN-CHANDRA

Mission Chief for China, Asia and Pacific Department, IMF

STEVE BARNETT

Senior Resident Representative in China, IMF

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 Ms. YAN: Good afternoon everyone! Welcome to this IMF press briefing at the conclusion of the 2023 China Article IV mission. My name is Ting Yan, Senior Press Officer from the IMF. I'm pleased to be joined today by our 4 speakers: We have Gita Gopinath, First Deputy Managing Director of the IMF. On her right side, we have Sonali Jain-Chandra, China Mission Chief. On her left side is Thomas Helbling, Deputy Director of the Asia and Pacific Department, and also Steve Barnett, the IMF's Senior Resident Representative in China.

Right before this press briefing, we just published the Press Release on imf.org. Hope you have had a chance to take a look and cover it. Today, Gita will start with opening remarks to summarize the key messages of the 2023 China article IV mission. Then we will be happy to take your questions. For those who are not able to join us in person, the video recording and transcript will be posted on imf.org afterwards. With that, Gita, the floor is yours.

MS. GOPINATH: Good afternoon and a warm welcome to everyone. We are here today to share our economic assessment for the People’s Republic of China. We've had constructive discussions with Senior Officials from the government and the People’s Bank of China, and we would like to share a few key messages. First, we project China's GDP growth to reach 5.4 percent in 2023, reflecting a strong post reopening rebound in domestic demand, particularly in assumption. We project growth to slow to 4.6 percent next year, as we expect the weakness in the property sector to continue and external demand to remain subdued. These forecasts are an upgrade from our previous projection. Specifically, we have revised up growth by 0.4 percentage points, in both years, relative to our October WEO projections. Reflecting stronger than expected growth in the third quarter and the new policy support that was recently announced.

Second, rapid expansion in the past in the property market and excessive investment in infrastructure resulted in elevated debt levels, notably among property developers, local governments, and local government financing vehicles. Against this backdrop, adjustment in the property market is warranted. The challenge is to minimize the overall economic costs from the adjustment and contain its macro financial risks. In this regard, we welcome the greater focus by the authorities on addressing the risks emanating from the property sector, from local government debt, and from small and medium banks, including at the recently concluded Central Financial World Conference.

Addressing these issues effectively will require implementation of a comprehensive policy package. For the real estate sector, such a policy package will require accelerating exits of nonviable property developers, removing impediments to housing price adjustments, and increasing central government funding for housing completion, among other measures.

For local government debt distress, the central government should pursue coordinated fiscal framework reforms and balance sheet restructuring to reduce the debt levels of local government financing vehicles. Tax policy measures are needed to close local government financing fiscal gaps. While improvements to local government's fiscal transparency and risk monitoring are necessary to prevent new vulnerabilities from emerging. As financial stability risks are elevated and still rising, strict application of prudential policies, and a strengthened framework for banks will be essential.

Third, supportive macroeconomic policies should be used to bolster activity amid the ongoing property sector adjustment. A reorientation of fiscal expenditures towards households and additional monetary policy easing, via interest rates, would support growth and investment. Greater exchange rate flexibility would help absorb external shocks and strengthen monetary policy transmission.

Fourth, China could demonstrate its commitment to an open and rules-based trading system and help reduce fragmentation pressure, by scaling back distortions to trade and investment from domestic industrial policies and trade restrictions, which create domestic challenges and global spillovers. China's role in supporting sovereign debt restructuring to low income and developing countries is welcome, and continued progress is needed for timely debt relief.

Fifth, looking forward, we expect growth to slow to about 3.5 percent in the medium term, amid headwinds from weak productivity growth and population aging, with further downside risk for rising fragmentation pressures. However, higher growth is within reach. Broad-based pro-market structural reforms can help boost productivity, facilitate rebalancing, and ignite new drivers of growth.

Let me conclude by noting that China has registered spectacular growth in recent decades, making impressive progress in raising living standards and eradicating extreme poverty. China's rapid growth has also generated positive spillovers to the rest of the world. By pursuing the policies that are built on further liberalization and increased multilateral cooperation, I am confident that it can create an economy that is more resilient, sustainable, and inclusive. Thank you.

MS. YAN: Thank you very much, Gita. Now we're opening the floor for questions. Please identify yourself with name and media organization and try to keep your questions short as we're trying to take as many questions as possible. Also, if you plan to ask questions in Chinese, please give us a heads up so our speakers can put their headphones on. We have Chinese interpretation today. Okay, let me take this lady in the front row, please.

QUESTIONER: Thank you so much. My question is that what do you think will be the pillar for China's economic growth in the coming years and do you think that country will able to sustain its resiliency in the near future?

MS. GOPINATH: For the near term we are seeing growth that is taking place in sectors like electric vehicles and green sector. So we see, for instance, investment in these particular sectors growing at the same time that you see shrinking in investment in the property market. However, the property market is much bigger in size than these newer sectors are, and so therefore, it is important to continue to have the adjustment in the size of the property sector and to provide support from the government to make this transition happen. That's going to be very important. More generally, looking ahead, broad-based pro-market structural reforms will be very helpful in raising productivity growth in China so that you can increase the medium term growth prospects for all of the economy.

MS. YAN: Yeah, first row here. First row here. Thank you.

QUESTIONER: Keith Branch from the New York Times. Do you have any concerns on whether China might try to export its way out of trouble, transferring its demand shortfalls to other countries? And in particular, when you call for greater exchange rate flexibility, do you have concerns that China might use its exchange rate to help increase those exports? Thank you.

MS. GOPINATH: We should recognize that over the last decade, China has substantially rebalanced where its growth has come from, not just relying on exports, but also towards domestic demand. And we think it is important for this process to continue. In that regard, we think, again, domestic structural reforms that increase the role of the market will be very beneficial for growth. Exchange rate flexibility is helpful for all countries to buffer their economy to shocks. And in the case of China, we think it will also help with the monetary transmission mechanism. And so we think exchange rate flexibility is important. China has made clear that they are rebalancing their economy. They are more focused on high quality growth, more inclusive, sustainable, greener growth. So all of that would therefore mean relying a lot more on domestic demand as opposed to export driven growth.

MS. YAN: Lady in the first row, please. Thank you.

QUESTIONER: Hi, good afternoon. This is Kim Lin Lo from the South China Morning post. I've got two questions. So, you've listed some recommendations for China's economy. What does IMF think should be the priority of China's structural reform? And the second question is, under a rising interest rate, many developing countries are facing a more imminent debt problem. What does IMF think China can do to contribute to solving the problem? And are there areas for cooperation? Thank you.

MS. GOPINATH: In terms of areas to address with policy in the near term, we see that it's very essential to deal with the issues in the property sector, which remains quite weak. And there are risks that if there is a very sharp correction in that sector, then that could spill over into the broader economy. So, ensuring the right measures to allow for this adjustment to happen without creating broader macroeconomic stress is going to be very important. And in this regard, our advice is to hasten the exit of unviable property developers. And we also think there's a role for the central government to provide funding to complete the housing projects that still need to be completed, because that can also raise sentiment.

The recent fiscal measures that were taken, the recent fiscal announcement that was made in the form of a 1 trillion renew bond for building climate resilience and also to address the recovery from the flood is helping, will help. It's one of the reasons we've upgraded our forecast for China. But in the medium term, China needs to raise productivity growth and also address the aging population. In terms of raising productivity growth, we believe that further opening up of the domestic market, state of enterprise reform, these are the kinds of measures that can play a very important role. And we also think, again, rebalancing where growth comes from, so away from investment more towards domestic consumption would be very helpful. And for that, having a stronger social safety net can provide that transition because then that can reduce the need of very high levels of stakeholders that currently Chinese households have.

MS. YAN: Thank you, Gita. Gentleman, here in the second row.

QUESTIONER: Thank you very much. (inaudible) the Dutch Public Broadcaster. You addressed market forces viability of the companies in the property sector. For the economy to be healthy in the medium to long run, do you expect that to happen without allowing larger scale bankruptcies in the industry? We now see mostly people like local mergers, local companies stepping in, sometimes local government financing vehicles. Do you think there should be larger bankruptcies in order to make the company more sustainable?

MS. GOPINATH: If you look at the property sector, we do expect to see, there is a need for further adjustment in the property sector to get to a more sustainable size. And to do that, and to make this transition happen, we do believe that we should be able to hasten the exit of unviable property developers. So, restructuring of these property developers, in chance enabling their exit would be beneficial because that will quicken the process of transition.

In the case of local government debt and local government financing vehicle debt, we also see a role for restructuring. Of course, one has to handle this with care. In the short term, some support for debt servicing can be helpful. But we do think that eventually we need restructuring, and we also need reforms to ensure that there is a much more sound financing basis for the local government, so that there is more sources of tax revenue that can match with the amount of spending needs that they have. So that getting more balanced on that front and increasing tax revenues is going to be important. Also, monitoring risk development in the local government, in their local government, borrowing is going to be important. Public financial management more generally will require more attention.

MS. YAN: Okay, gentlemen, a second row, please. Thank you.

QUESTIONER: Thank you, good afternoon. Joe Cash from Reuters. Has China shown the IMF a deal that has supposedly been struck between China EXIM Bank and Sri Lanka for debt restructuring? Thank you.

MS. GOPINATH: I’m sorry, could you repeat the question again?

QUESTIONER: My question is, has China shown the IMF, the deal that has supposedly been struck between the China EXIM Bank and Sri Lanka? Thank you.

MS. GOPINATH: So we are aware of the deal that has been agreed on between China EXIM and Sri Lanka. We have constant engagements with EXIM. We have not seen the details of this yet, but this again should come out through our routine engagement.

MS. YAN: Thank you. In the fourth. Yup.

QUESTIONER: Good afternoon. I'm reporter from Global Times, and I have two questions. The first one, today China released its foreign trade data. Each reflected that is October data up 0.9 percent year on year. So what's your opinion about last month statistics? And the second question, is what's your expectations of its GDP growth in the first quarter? Thank you.

MS. GOPINATH: Yes, I believe I've heard about this recent data that has come out that's in positive territory for trade. At the same time, given that globally, we are seeing, we are projecting growth to slow this year and to be close to around 3 percent over the medium term. Which is much lower than the growth that we projected in the past two decades, when the medium term growth was around, we used to project was around 3.8 percent. Now we're down to 3 percent. So global demand is not what it used to be. So, we do expect that there will be headwinds more generally for countries from the external demand. In addition, fragmentation pressures are building up in many places. And we do believe that we do see that that is a headwind for China in terms of its reliance on if it was rely on external demand. On the question on fourth quarter GDP growth, would you like to come in Sonali?

MS. JAIN-CHANDRA: Sure. Thank you. So, for this year as a whole, we have just upgraded growth to 5.4 percent. And in terms of the sequential story over the course of the year, after a sharp rebound in Q1, we saw some payback in Q2. And we see the second half of the year broadly as a time of stabilization of the economy. So, and in terms of the year as a whole, as the First Deputy Managing Director said, we have upgraded growth both for 2023, as well as 2024, and the two factors are the stronger than expected Q3, as well as the fiscal support that was unveiled.

MS. YAN: Are there any more questions in the room? We have a lady in the back. Yes, in the back row.

QUESTIONER: Hello. I’m a reporter from Tai Ting (phonetic) And my question is focused on the cross-border capital flow. And we have noticed that China has recently experienced the dip in capital flow, but also foreign direct investments. My question is, in terms of China's growth and midterm development, how do you foresee this trend to change or how do you foresee this trend to impact China's future GDP growth and economic growth in a more general sense? Thank you.

MS. GOPINATH: We've seen that recently capital flows into China are much more subdued, and the most recent net fundraising number is in negative territory. Obviously, this reflects a combination of factors. One is just looking at projections of weaker medium-term growth that can have an effect on capital flows coming into the country. Second, there is a big difference between returns that you can make on very safe assets and US Treasuries, which are now giving instantaneous. US Treasuries now give over 4.6 percent yield. While on the other hand, China, because given the stage of the recovery of the economy, is appropriately keeping interest rates low. So that difference can also affect the amount of capital flows coming into the country.

Policy uncertainty can also play an important role. So again, more generally, in terms of raising growth and attracting more capital flow into the economy, it is going to be important to just have, do the kind of structural reforms that I mentioned, which is productivity enhancement reforms, pro-market reforms, continuing to open up the domestic market, policy certainty, all of that can be very helpful. That also will attract investment into the country.

MS. YAN: Here.

QUESTIONER: Do you have any concerns about possible deflation, given the falling prices for real estate, and also producer prices are now down year on year, twelve consecutive months? Consumer prices were down year on year for July, (inaudible) in August, and flat in September. Thank you.

MS. GOPINATH: So, headline inflation clearly has come down quite a bit, but we see that as being driven mainly by food prices and energy prices. We don't expect to see a general deflation trend in China. We expect, in a year from now, inflation to be squarely in the positive territory. Core inflation is already in the positive territory right now. So no, that's not our expectation.

MS. YAN: Let's go with the lady in the first row here. Yeah. Thank you.

QUESTITONER: From Bloomberg News. So I have two questions. Firstly, I want to ask about your view of the latest fiscal stimulus China announced on the higher budget deficit ratio. Do you think that marks a shift in authorities’ mindset towards how to stimulate the economy going forward, and if you have any recommendations on that? And secondly, I wanted to ask you about your impression from authorities when you were exchanging these with them on the topic of structural reforms, what are their concerns or what are the main reasons that some of the reforms have been slow? Thank you.

MS. GOPINATH: So, on the fiscal measure that was recently announced, the trillion RMB, special bond issues, we welcome that. I think that is helpful for building climate resilience and also is going to help with the recovery. It's one of the reasons why we have upgraded our growth forecast for this year and for next. Our recommendation is that for next year, fiscal policy should remain neutral, and we continue to encourage a rebalancing of government spending measures towards more that supports households away from investment. And so we think that that would bring back even stronger consumption into the economy, which is what is needed more sustainable for more sustainable growth.

I have had very, very good discussions with the authorities over the past two days. Firstly, there's a very clear recognition of the main issues that need to be addressed. Most recently, we came out of the Central Financial Work Conference. That the three risks that we are paying attention to, which is the property market, the small and medium-term banks, small medium banks, and also from local government debts. So those three areas of risk are, they clearly are focused on it, and they recognize the importance to address it.

In terms of structural reforms, they also are very focused on having higher quality growth and being less concerned about this overall growth number, but making sure that it is of high quality. Which means they're driven by more sustainable sectors, green sectors, more inclusive growth. I also do think that they are in the phase of this is the recovery from the reopening that happened this year, but I expect that they will continue to push ahead on reforms.

QUESTIONER: Sorry, I had a second question just now. On the rising interest level and what IMF expect China to do with helping developing countries debt problems and the cooperation between IMF and China on this issue? Thank you.

MS. GOPINATH: Yes. Sorry, I did not answer that question. Yes, you're right. So we do have several low income countries, particularly either already in debt stress or in high risk of debt stress. So that's about 55 percent of low income countries are in that category. And these are countries that have also faced the pandemic, they faced the rise in food prices, and energy prices, and of course now they also have the rising interest rates. That makes it difficult for them to finance themselves.

China has played a very important role in working with these countries and providing debt relief. We work very closely with China in this area. I think a progress has been made. If you look at the different country cases, starting from Chad all the way to the more recent cases of Sri Lanka and Ghana, things are getting done faster. It's taking lesser time to be able to provide relief to countries. But that said, we still have to make a lot more progress. We need to be able to provide even more timely debt relief. And again, China is a very important player in this space.

MS. YAN: Do we have more questions in the room? Oh, there's one in the back.

QUESTIONER: Can I have an add on question in terms of I noticed that first, you raised the projection by 0.4 before, and I also noticed that you have 4.6 percent as the projected GDP growth for 2024. And may I just ask first, what are the fundamental presumptions for raising the projected numbers? And also, what are the underlying consumptions for China's economy for your projections for 2024 and 2028 I presume? Thank you.

MS. GOPINATH: So the reason we upgraded were two reasons for it. One is the third quarter GDP growth came up, came out stronger than we expected, and it was importantly driven by stronger consumption than we had expected. So that was one reason. The second reason is the additional fiscal stimulus that was recently announced, that is raising growth for this year and for next. And last, Sonali, if you want to comment on specifically on consumption, more generally on anything on consumption?

MS. JAIN-CHANDRA: Yes. So, for this year, we have quite a strong contribution of consumption to growth. And this proportion, we expect, will decline a little bit next year. And I think the reason is this year the consumption was very strong, given the low base effect from reopening post pandemic. So, we expect consumption to have some momentum next year, but that the contribution to GDP growth will be slightly lower than this year.

MS. GOPINATH: I also think since several of you raised the question about structural reforms and more medium term growth, I'd like Thomas, if you could come in and shed some more light on how we're thinking about medium term growth in China.

MR. HELBLING: Thank you, Gita. As you mentioned, on two, I think, sort of broad priorities. One is raising productivity growth. There we see two broad angles. One is, I think, a level playing field between the private and state-owned sectors to foster innovation. Then also second, opening of the economy. That's internationally, but also locally, I think there's still many local trade barriers. So if China becomes unified national markets that would also help rise market size, firm size, and help productivity.

Then we also think it will be important to change the sources of growth to rebalancing from overly reliance on investment towards more consumption. Key reform there is strengthening the social safety net to reduce the need for very high rates of household saving, and free up these resources for household consumption to grow and in particular services sectors to develop further relative to manufacturing.

Then thirdly, given population aging, we see scope to delay the impact on the labor force, in particular through pension reforms, raising the pension age, and so keep more people in the labor force for longer. Thank you.

MS. YAN: Thank you. Let's see, are there any more questions? Or if not, I don't know. Steve, do you have anything to add? No? Okay. Oh, okay. The lady in the back. Thank you.

QUESTIONER: Thank you. I'm from Phoenix TV. I just want to confirm one of the things that you said when you talked about the real estate market. You said one of your suggestions is to remove barriers to house price adjustment, if I remember correct. So I just confirmed do you mean that your suggestion is to remove all purchase restrictions in Chinese housing market? Thank you.

MS. GOPINATH: Solani, that’s yours.

S. JAIN-CHANDRA: So by that recommendation we mean removing impediments to the adjustment of housing prices. To allow housing prices to move more flexibly to allow for the adjustment.

MS. YAN: Thank you. Oh, yeah. Lady in the first row here, yes.

QUESTIONER: Hello, hi. Can I just add a question on monetary policy? What's your recommendation for China's monetary policy next year? Do you see, how much room do you see for rate cuts and RRR cuts? And you know, we noticed that there has been a greater focus on maintaining the stability of exchange rate over the past few months in China. Do you think that's sort of limiting the authority’s ability to ease monetary policy? Thank you.

MS. GOPINATH: For monetary policy, we think it's important for monetary policy to remain accommodated and also to ease and to do that through further cuts and interest rates. That would be our recommendation. On the exchange rate, we are in this environment where interest rates, in the US for instance, has gone up by a lot compared to China. And if you look now at the interest rate gap between US Treasuries and China debt, you can see that it used to be that Chinese instruments used to pay a higher interest rate than US instruments did. And now that's flipped around. So, the pressure on the currency is going to be there just coming from that channel. That's a very fundamental source of pressure on the currency. And given that we expect interest rates in the US to stay high for long, and not come down very quickly, we expect this pressure is going to stay. So, we absolutely see the reason, we think it will be good for the exchange rate to adjust to these fundamentals and to flexibly adjust to it, because that can also then help with addressing inflation problem in terms of making sure inflation comes back up to target. That can be very helpful.

MS. YAN: I think we have one more question here.

QUESTIONER: Yes, Keith Bradsher. One way, within your time, one way that China has prevented faster or very fast currency adjustment is with very tight capital controls that, if anything, have gotten even tighter in the past year or two. Are you advising any loosening of them or do you favor adjustment more on the extent to which they informally peg the currency exchange rate? Thank you.

MR. HELBLING: Two things. In the short term, I think we have the overall macroeconomic policy recommendations and greater exchange rate flexibility, together with monetary policy easing, and some fiscal support within the recommendation is the mix. I think we see then that in the longer term, a role for more efficient and deeper capital markets, and opening up the financial encounter, opening up the capital flows there, can play a role. I think, from the current framework, that would need to be a gradual, well sort of designed process, with regulation and safeguards in place.

MS. YAN: Okay, lady in the back. Yes. Please wait for the mic, thank you.

QUESTIONER: From India. So, some organizations are concerned that there may be a double dip in the Chinese real estate market. What is your perspective and advice on this? Thank you.

MS. GOPINATH: We actually are in a double dip right now. The property sector was recovering in the first quarter of this year and again started slowing down. So that will be consistent with how we see things.

MS. YAN: Okay. Are there more questions? Okay. Yes, please.

QUESTIONER: Good afternoon. I’m a reporter from CEN (phonetic) Finance Agency. I have one question. In your opinion, what are the new opportunities for China's economy in the future? Thank you.

MR. HELBLING: Thank you. So opportunities, I think, arise from good fundamentals. I think we think of human capital, we think of good business environment, so we would see these as the first factors for the environment. If you look at China, China has moved up the value chain, has fostered its human capital, has fostered research and development. So we would expect that research and development and innovation will play a greater role going forward. And as such, as China has invested a lot in infrastructure in the past. That too, that overall combination of policies should allow for further China to allow to exploit further opportunities in finding new products, evolve new markets more broadly. And then we have the supplementary policies that will foster that environment. We have mentioned that rebalancing stronger social safety net, more efficient capital allocation, perhaps some SOE reform. And then I think some of these growth opportunities, opportunities will develop organically.

MS. YAN: If we don't have any more questions, I think it's time for us to conclude this press briefing. Thank you very much again for joining us today. We have posted both English version and the Chinese version of the press release on IMF.org. I would encourage you to take a look, and if you have further questions, please do not hesitate to contact me bilaterally after this. Thank you. Thank you very much.

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