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IMF Report on China

Posted by nexvucapital on July 27, 2013

We thought we would bring you some interesting weekend reading from the IMF.

Full Report:

IMF 2013 Report on China

PEOPLE’S REPUBLIC OF CHINA
STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION

KEY ISSUES

Overview.

China’s economic performance over the past three decades has been remarkable, a testament to
its ability to implement necessary but difficult reforms. Continued success now requires another round of
decisive measures—in line with the new leadership’s expressed intention to re-energize the reform effort.
Outlook and risks. Staff expect the economy to grow by 7¾ percent this year, although with downside risks
from both external and domestic uncertainties. Since the global crisis, a mix of investment, credit, and fiscal
stimulus has underpinned activity. This pattern of growth is not sustainable and is raising vulnerabilities.
While China still has significant buffers to weather shocks, the margins of safety are diminishing.

Policies.

To secure more balanced and sustainable growth, a package of reforms is needed to contain
the growing risks while transitioning the economy to a more consumer-based, inclusive, and
environmentally-friendly growth path.

In the near term, a priority is to rein in broader credit growth and prevent a further build up of risks in 
the financial sector. Only if growth were to slow too sharply below the authorities’ target, on-budget
fiscal stimulus should be used in a manner that supports re-balancing and helps protect vulnerable
groups.

Accelerated financial sector reforms are needed to secure a safe transition to a market-based financial
system. This will combine allowing greater room for market forces (such as liberalizing interest rates in
the ‘traditional’ banking industry) with strengthened oversight, governance, and investor accountability.
While this will lead to higher borrowing costs for many firms, it is critical to reduce the large-scale
regulatory arbitrage and moral hazard evident in the current system, and to improve the allocation of
credit essential to future growth and sound finance.

The post-2008 expansion in quasi-fiscal activity needs to be gradually unwound. Key reforms to this end
should include a comprehensive revamp of local government finances, increasing SOE dividend
payments to the budget, and continuing tax reforms allowing, inter alia, a shift in the tax burden away
from regressive social contributions.

A more market-based exchange rate, with reduced intervention, will facilitate further adjustment in the
renminbi which staff assess as moderately undervalued against a broad-basket of currencies.

A range of other structural reforms will support re-balancing and help unleash new sources of growth,
such as opening markets to more competition, reforming resource prices, and gradually liberalizing the
capital account.

Benefits.

With a successful transition, China will grow at a healthy pace for years to come. Activity may be
somewhat slower, a trade-off worth making for the benefit of much higher income in the medium to long
run—a growth trajectory that will also be good for the global economy.

Full Report: 

IMF 2013 Report on China

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