Transcript

Press Briefing on 2023 China Article IV Staff Report

February 2, 2024

PARTICIPANTS:

Moderator:

TING YAN

Senior Press Officer, Communications Department

IMF

Speakers:

THOMAS HELBLING

Deputy Director, Asia and Pacific Department, IMF

SONALI JAIN-CHANDRA

Mission Chief for China, Asia and Pacific Department, IMF

NIR KLEIN

Deputy Mission Chief for China, Asia and Pacific Department, IMF

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T R A N S C R I P T

MS. YAN: Good evening, everyone, and also good morning to those who are joining us online from Beijing. My name is Ting Yan. I'm from the Communications Department. Welcome to join this 2023 China Article IV Staff Report Press Briefing.

I'm glad to be joined today by our three speakers. We have Thomas Helbling, Deputy Director of the Asia Pacific Department and also Sonali Jain-Chandra, Mission Chief for China, Asia Pacific Department, as well as Nir Klein, Deputy Mission Chief for China.

I have just shared with everyone our embargo Staff Report, as well as press release, and also a Country Focus Article focusing on our China's real estate sector. I hope you have had a chance to read the report, so for today, Sonali will start with some opening remarks to summarize the key messages of our report. Ad then we will be happy to take your questions online. With that, Sonali, the floor is yours.

MS. JAIN-CHANDRA: Thank you, Ting. Good evening, everyone and good morning to everyone joining us from Asia. As Ting said, I will start by summarizing some of the key messages from the 2023 China Article IV Consultation. The consultation took place against the backdrop of continuing property market contraction, now in its third year. Which has had significant knock-on effects on activity and also has led to elevated local government debt risks. Given this, much of the consultation was focused on the property sector and the local government debt issues.

Turning first to the implications of this for the near-term outlook, we project real GDP growth to slow to 4.6 percent in 2024, after a strong post Covid reopening rebound of 5.2 percent in 2023. We see weakness in the property sector continuing this year, with real estate investment declining further amid excess housing inventories, unresolved developer stress, and weak homebuyer sentiment.

Second, there is also uncertainty on the evolution of the property sector. On balance, we think this poses important downside risks to the baseline. A deeper and more prolonged property sector correction could weigh on domestic demand and confidence, especially if accompanied by further stress in local government finances. It could also generate adverse macro financial feedback loops. Risks to the outlook also stem from external factors, including weaker than expected external demand and geoeconomic fragmentation.

Against this backdrop, much of the policy discussion during the consultation focused on policies to help the property sector transition to a smaller and more sustainable size, and to lower local government debt risks, while reducing macro financial risks more broadly. This is essential to bolster near term activity, restore confidence, and mitigate risks.

The report focused on three key recommendations. First, the authorities should expedite restructuring of nonviable property developers and support housing completion. Also, there is a need for greater price adjustment. Second, the authorities should implement a comprehensive central government led strategy to reduce the stock of local government debt, by restructuring unsustainable local government financing vehicles through insolvency mechanism. Including debt write downs and public asset sales. Third, adequate macroeconomic policy support should be provided to smoothen the impact of the adjustment of the property sector.

We recommend continued monetary policy accommodation via interest rates and a budget neutral fiscal package, which would shift the composition of spending towards households. This would better support growth amid the property sector adjustment.

The final point I wanted to mention is that the report also revisits medium term challenges, such as an aging population and slowing productivity growth, which are adding to the economic headwinds. We outline broad based structural reforms that can boost growth potential and support the transition to a higher quality growth in the report.

And just before I end, I wanted to clarify a point on the growth numbers. There is a slight difference in the growth numbers for 2023 in the Staff Report that you have received, as opposed to the World Economic Outlook update which was released a few days ago. The Staff Report was prepared and sent to our Executive Board in late December, before the 2023 Q4 and year end GDP data were released. And at that time, we had forecast growth for 2023 to be 5.4 percent. In January, the GDP data, as you know, for 2023 was released and the outturn was 5.2 percent, resulting from weaker than expected consumption in the fourth quarter. And so the outturn is reflected in the WEO Update and to highlight the 2024 forecast is 4.6 percent, the same in both publications. Thank you. Back to you, Ting.

MS. YAN: Thank you very much, Sonali. And I also want to remind everyone that the report, as well as this briefing, are both under embargo until 04:00 a.m. tomorrow, Friday, DC time, which will be 05:00 p.m. Beijing time. So everything is under embargo until that time.

Now we are opening the floor for Q&As. If you have any questions, please use the raise hands function on WebEx or you can submit your questions in the chat box. So if you have any questions you can use the raise hands function on WebEx then I will call on you. I will probably take a couple of questions together so our speakers can answer them one by one. We have Evelyn. Evelyn, go ahead.

QUESTIONER: Hi. Can you hear me?

MS. YAN: Yes, we can hear you.

QUESTIONER: Great. Thanks so much everyone for taking the time to do this briefing. I do have a few questions. First, there was a very interesting line in the report saying that the authorities are developing a policy package to prevent and resolve local government debt risks. Was there a sense on, you know, how large this might be, you know, there is more willingness for the central government to contribute in terms of the debt side? Or, as you also pointed out, it seems that Beijing wants the local government to bear more of the responsibility.

And then following on that, last week, the PBOC head kind of made it sound like the local government debt problems were very regional and under control. I'm wondering if that's in alignment with your assessment.

And then my other questions on how much really are these external factors that the Chinese authorities seem to talk about? You know, are those really the biggest concern for China versus the domestic ones? Maybe elaborate a bit more on that, especially as it seems like there's more predictions that China would be getting into some kind of trade war with more countries if its auto production and manufacturing investment are to continue. Thanks.

MS. YAN: Thank you, Evelyn. I don't see any hands now. So, Sonali, you want to take these questions?

MS. JAIN-CHANDRA: Sure. I can take the first one, and then Thomas or Nir may want to come in on the second one. First, on the question of the authorities developing a policy package to deal with local government risks, this was prominently featured, of course, as you know, in the Central Financial Work Conference, and we very much welcome that. The Work Conference called for the creation of a long-term mechanism to resolve local government debt. Some of the details of this, including the size, as you asked, are yet to be disclosed by the authorities. I think we look forward to that.

We think that a coordinated action will be needed to restructure stressed local government financing vehicles, as well as further reforms to close financing gaps at the local government level. We think action will be needed from the central government level to achieve this. Thank you.

MR. KLEIN: I can respond on the question about external risk factor versus domestic. So let me first clarify that the authorities do see domestic factors, you know, including the adjustment in the property market, as a key risk. At the same time, they also see external factors contributing to possible downside scenarios. And in this context, they see increased fragmentation pressures as very worrying developments. They, of course, concerned that this will affect their local firms’ ability to export. We've seen some negative developments in the last year, in terms of exports and in terms of FDI. Those reflects a combination of cyclical factors as well as some structural elements, including, you know, fragmentation pressures. Let me stop here. Thank you.

MS. YAN: Thank you. If you have any questions, you can raise hands on WebEx. We have two questions I think on property market in the chat. One is from Amanda Lee from South China Morning Post. Do you think China is doing enough to downsizing the property sector? Where do you see there should be better support? Many thanks. And Kai Kang from Caijing Magazine. How do you view the future of China's real estate industry? What kind of policies should central and local government need to implement to support Chinese real estate industry?

MS. JAIN-CHANDRA: Thank you, Ting. I can take these two questions which are very much related. I think I'll first start with the outlook for the property sector and then touch upon the policies that we think that are needed. On the outlook, the property sector is in the midst of a multi year transition to a smaller and more sustainable size. Some of this adjustment has happened, but we are still in the midst of it. In our baseline projections, we expect that real estate investment will continue to contract further in 2024 amid continuing financial stress amongst developers, slowing fundamental demand for housing, and the inventory overhang.

In terms of the policies that have been undertaken by the authorities, they have put in place a number of demand-side measures, including loosening restrictions on mortgages. And also they have taken some supply-side measures in terms of providing financing for the completion of unfinished housing. Even so, we think more needs to be done to put the housing market on a path towards a smoother transition to a smaller size, as I had mentioned.

I would highlight a few key recommendations from the report. First, we think that the authority should accelerate the exit of non-viable developers. This will help restore confidence of homebuyers. Second, it's important for the central government to come in with increased financing to complete the unfinished presold housing. This is another factor that has been holding back confidence in the market. The report this year, as well as last year, provides estimates of the cost of completing unfinished housing. And we put this at about 5 percent of GDP. And the third policy priority should be to allow greater adjustment in prices. Thank you.

MS. YAN: Thank you. Do we have more questions here? Juanjuan, please go ahead.

QUESTIONER: Hello. Thank you for taking my question. Juanjaun from China Fund News. So as you pointed out, key property sector vulnerability have yet to be addressed. So I think the question really is, based on your consultation, how are the policymakers assess the problem? Do they understand how serious the problem is as much as you do? And the second question is, in terms of long-term structural factor, you pointed out the demographic change. I was wondering, how do you see the process of urbanization, which is also a key factor in determining the housing market? And where China is in the urbanization process, do you think it's almost down or there is still room to go? Thank you.

MS. JAIN-CHANDRA: I can take that thing unless you want to take other questions.

MS. YAN: Yeah, I don't see any other hands. No.

MS. JAIN-CHANDRA: Okay. So on the first question on the authorities perception of the problem, we had in depth discussions on the property sector indeed. The authorities, in the context also of the Central Financial Work Conference, have prioritized resolving the property sector issues. They have also, as I had just outlined, taken a number of steps to address stresses emanating from the property sector. I think I had not mentioned in my previous response, they're also intending to ramp up spending on social housing as well as urban redevelopment, with a view to, first of all, provide social housing, but also to support the property sector. So a number of policy efforts are being undertaken. We encourage them to go further along the dimensions that I had elaborated a little while ago.

On long term structural factors, indeed, demographic factors are key, and this is one of the key factors why we think fundamental demand for housing in China will be lower going forward. This is contained in our analysis, which is explained in the report.

On the specific question of urbanization, we think that there is more to go in terms of urbanization for China. China's urbanization rate is around 65 percent and, you know, the average for set of countries we look at is closer to 80 percent. So there is some further room to urbanize in China. But of course, the pace of urbanization will slow down in the future relative to China's past, and that will weigh on the property sector in large cities. Thank you.

MS. YAN: Thank you. We have a question, actually, we have two hands now. One is from Matthias Kamp, the other one is from Robin Mak. Matthias, please go ahead.

QUESTIONER: Thank you. Good morning. This is Matthias from the Swiss Daily Newspaper and I'm based in Beijing. Thank you so much for the presentation. And another question on the property sector. Could you elaborate a bit about what the impact of the crisis in the property sector might be on the financial system in China, especially the state owned banks, domestic banks? I mean, most of the property sector's debt is within China and not abroad. So I would be very interested to learn if we could probably face a financial crisis in China. Thank you.

MS. YAN: Thank you. Let's take the next question. Robin, you want to come in?

QUESTIONER: Hi, yes, this is Robin from Reuters, bringing views in Hong Kong. I just had a question on the LGFV debt restructuring. I mean, you mentioned a couple of strategies, including debt write-downs and asset sales. I mean, can you just elaborate a bit more in terms of what that actually means? Who is going to bear the brunt, like who is going to absorb a lot of the losses? Is the government, central government, going to step in to sort of fund a lot of the restructuring? And is there, you know, structural tax reforms needed, for example? Just a little more detail on this point. Thanks.

MS. JAIN-CHANDRA: Thomas would want to come in.

MR. HELBLING: The financial sector implications of the property market correction we will note a number of points. Clearly, developer and project distresses from unfinished housing project pose some credit risks. We think that the authorities have the possibility control the financial sector implications. In particular, also through forbearance. We would note that many banks start with a very strong capital position. Macro prudential measures have been very tight, so there is substantial equity capital by households in the housing market. So we think these are factors that will contain the immediate financial sector risks. Whereas the longer-term risks from developer finance in particular will need to be assessed. And there is currently an ongoing financial sector assessment program mission that will look in detail into the banking sector implications of the housing market correction.

MS. JAIN-CHANDRA: I can take the second question on LGFV debt restructuring. So our recommendation is that there needs to be a triage of LGFVs into ones that are sustainable and ones that are not, that are unsustainable. And for the unsustainable LGFV, since they're technically corporates, there is a corporate insolvency regime, and they can go through this. And ultimately, we think that the best solution is for there to be burden sharing across different creditors with the central government, local governments, as well as investors sharing in the burden. Thank you.

MS. YAN: Sonali, actually, we have one question also in the chat regarding LGFV. Local government sold more than 1 trillion yuan of special financing bonds last year to swap hidden debt. But the amount looks tiny compared with the outstanding LGFV debt. Is this an effective approach to diffusing the local debt risks? Are there better ways? How long do you think it would take China to resolve this issue? I believe this is from Bloomberg.

MS. JAIN-CHANDRA: Sorry, I couldn't hear very clearly. It's in the chat?

MS. YAN: Yeah, it's in the chat box.

MS. JAIN-CHANDRA: Okay.

MS. YAN: And meanwhile, anyone has any questions, want to raise hands and come in? Evelyn, you have a follow up question?

QUESTIONER: Yes, I was wondering, on inflation, how do you view that divergence between the core CPI and then the overall CPI? Just how bad is the inflation situation, especially given expectations that the overall number is going to pick up this year?

MS. YAN: Thank you, Evelyn.

MS. JAIN-CHANDRA: Thank you. Let me start with the first question, in the chat, on local government refinancing that was done this year. So it's true that there was a special refinancing bond to swap some of the local government financing vehicle debt this year. I had already outlined our recommendation in terms of a strategy to address the stock of local government debt, which should entail insolvency mechanisms. Through which, there can be debt write offs which should be a part of the solution, as well as asset sales,

And in terms of burden sharing, I had mentioned various creditors should be a part of the solution. There are different approaches, but that's our recommendation.

In terms of inflation, yes, there is a divergence between core and headline inflation. Headline inflation has been negative between October and December, but this largely reflects food and energy prices. So as you notice, there's a divergence. Core inflation is positive, but at very low levels. In our baseline projections, we don't expect persistent deflation. Rather, we expect inflation to inch up as the base effects from commodity prices unwind and the output gap closes. To be specific, we project average inflation to be 1.1 percent, rising from 0.3 percent this year, over last year.

MS. YAN: Thank you. We have a question in the chat again, Huirong Wang, from The Paper. From the perspective of the troika of driving economic growth, consumption, investment and export, how do you think China will drive economic growth by the choices in 2024? And how do you expect China's monetary policy to go in 2024? Will China's yuan strengthen this year?

MS. JAIN-CHANDRA: Nir, do you want to take this?

MR. KLEIN: So in terms of the component of the domestic demand, we see consumption slowing down relative to 2023, but still growing. In 2023, we have a strong base effect after the reopening of the economy in late 2022. So there was a pent up demand that is expected to fade out gradually. So private consumption will slow. Investment will -- we expect some pickup in investment. But this is largely driven by public investment. As you know, the authorities have introduced announced a fiscal stimulus at the end of last year. We expect part of the stimulus to be spread over this year and result in higher public investment.

In terms of exports, as I mentioned earlier, exports have declined in 2023. This year, we expect some modest pickup in exports, which is largely driven by a more favorable terms of trade. As regard to the monetary policy, our recommendation is for further monetary easing. We think the authorities plan to continue in that direction. We've seen some easing in 2023. More recently, we've seen a reduction in the reserve requirement ratio. We think this is a move in the right direction, but we think that additional monetary policy is needed, particularly via the policy rate instrument.

At the same time, we think that China needs to implement some monetary policy reforms. In particular with regard to phasing out deposit rate guidelines, credit targets, and structural credit policies. I'll stop here. Thank you.

MS. YAN: Thank you. Do we have any more questions online? I don't see any hands. Fran, you want to come in? Go ahead. Yeah.

QUESTIONER: Yeah. Can I follow up on the LGFV debt issue, please? I just read in the latest report that the IMF's estimate of LFGV debt, outstanding, looks to be 65.9 trillion yuan as of this year. I saw the number in the IMF's report, about a year ago, for estimate for this year was 74.4 trillion yuan. So why is the estimate down now? Do you think this has anything to do with China's effort of bringing down LGFV debt over the past year? And do you think the trend will go on? Is this part of China's effort to, kind of, bring off balance sheet debt to on balance sheet debt for the government? So basically, what's the main reason for the reduction of the estimate?

MS. YAN: Thank you, Fran. Let me check if there are there any other questions we can -- Sonali, you want to respond or?

MS. JAIN-CHANDRA: Are there any other questions? Maybe we can group some.

MS. YAN: Yeah, I mean, I don't see any hands. Anyone has any questions? Not now.

MS. JAIN-CHANDRA: I think we can -- that's a very specific question. Maybe we can get back to Fran bilaterally?

MS. YAN: Yeah.

MS. JAIN-CHANDRA: I would need to check precise numbers and can get back to her.

QUESTIONER: Sure. Thank you.

MS. YAN: Thank you. I don't see any more questions online, so I think if we don't have any questions, we can wrap up here. Thank you, everyone, for joining us. And thank you, Thomas, Sonali, and Nir. So we will just remind you that both this briefing and our report, will be embargoed until tomorrow, 04:00 a.m. DC time, which will be 05:00 p.m. Beijing time. And if they have any further questions or want to clarify anything, feel free to email me. Thank you very much. Thank you, everyone. This concludes this press briefing.