Chinese economy moving to “more sustainable growth”, says IMF

19 Aug 15

The International Monetary Fund has endorsed the Chinese government’s economic strategy but has forecast that the country will not grow as quickly in 2015 compared to last year.

In its annual analysis of the Chinese economy, the fund said it was “transitioning to a new normal, with slower yet safer and more sustainable growth”.

The fund is forecasting growth of 6.8% this year, which comes after the country’s biggest currency devaluation in two decades last week. This represents a fall compared to the 7.4% expansion in 2014.

Policymakers have been trying to pursue important economic reforms to strengthen the Chinese economy in the long-run, the IMF said, as it backed a host of changes.

“[IMF directors] welcomed the progress made in this regard, including by slowing down credit growth, especially in shadow banking; moderating investment, led by a slowdown in residential real estate; and passing a new budget law aimed at safeguarding fiscal sustainability,” the fund said in its analysis.

However, it also called on China to consider “reining in vulnerabilities” as a priority with deeper economic reforms needed “to make the Chinese economy more open and market-based and promote further internal rebalancing”.

These include moving to a more market-based financial system and monetary policy framework by completing interest rate liberalisation.

The government should also look towards reforming state-owned enterprises and strengthening its fiscal framework, including local-central government relations, the social security system, and tax policy, an IMF statement said.

“[IMF directors] noted that these reforms are in the authorities’ agenda and welcomed the steps that have been taken. Looking ahead, they urged steadfast and timely implementation of the envisaged reforms.”

The fund urged Chinese policymakers to take a “wait-and-see-approach” in terms of implementing any new monetary policies. This is because significant easing would risk making worse the credit and investment vulnerabilities, the IMF said.

China should start a gradual consolidation next year that lowers the deficit to 8% of gross domestic product by 2020 and puts public finances on a sustainable path, it also said.

“Directors highlighted the challenge of managing the slowdown, and recommended that macroeconomic policies should be calibrated to achieve an orderly adjustment by aiming for gross domestic product growth of 6.5 to 7% this year and 6 to 6.5% next year,” the fund noted.

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Public Finance International and Public Finance. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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