China’s growth has slowed significantly in recent months. But even its current pace of expansion may not be sustainable, the International Monetary Fund warned on Wednesday, unless China starts making significant and systemic economic changes — and soon.
“Since the global crisis, a mix of investment, credit and fiscal stimulus has underpinned activity,” the I.M.F. said in a major annual assessment of the Chinese economy. “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.”
The report emphasised increasing risks to the Chinese economy, touching on familiar themes though with more urgency than previous reports.
China still has large foreign currency reserves and plenty of room for new government spending to buffer any unexpected shocks, Markus Rodlauer, the I.M.F.’s China mission chief, said in an interview. But he said the Chinese economy was becoming more vulnerable and change was becoming more difficult to make as time passes.
The I.M.F. — with a variety of international economic officials, research groups, academics and financial market participants — has raised concern that money is pouring into mispriced real estate and infrastructure investments in China that are increasing growth in the short term but might do little for the Chinese economy later.
For decades, a cheap currency, cheap labour and huge infrastructure investment fuelled enormous growth. China has made “substantial” progress on rebalancing its trade deficits with the rest of the world, the I.M.F. said, and its current-account balance as a share of its total economy is less than a quarter of its precrisis peak.
The fund described the Chinese currency as “moderately” undervalued, as it has for about a year after a long stretch of calling it “significantly” undervalued — a policy manoeuvre that helped increase China’s exports but angered many countries whose goods became relatively less competitive.
But imbalances in China’s domestic economy “remain large,” the I.M.F. warned, as Chinese consumers have not replaced consumers from the United States, Germany and other countries who helped stoke China’s growth for years. Consumption rates have barely budged from last year. But net purchases of physical assets like roads, hospitals and commercial buildings grew further as a share of the economy.
“A decisive shift toward a more consumption-based growth path has yet to occur,” the I.M.F. said. “Accelerating the transformation of the growth model remains the main priority.”
The fund focused on a few areas of acute risk.
One is the financial system. China has had a huge boom in lending through “less regulated” parts of its financial system, the fund said. It raised concerns about the adequacy of China’s regulatory controls, the quality of underwriting and the pricing of risk.
The formal banking sector might not be as strong as it looks, either, the I.M.F. warned. “Based on reported data, bank balance sheets appear healthy and loan books show only a modest deterioration in asset quality,” the report said. “However, banks remain vulnerable to a sharper worsening of corporate sector financial performance.”
Another issue is a proliferation of debt-financed spending by local governments without adequate tax bases, often through “local government financing vehicles” that have long been regarded as a weak spot in China’s markets. “Further rapid growth of debts would raise the risk of a disorderly adjustment in local government spending,” the I.M.F. warned.
Finally, it cautioned of the possibility of plummeting prices in real estate markets. It said real estate remained “prone to bubbles” in no small part because many Chinese savers do not earn interest on their deposits and, as a result, push money into housing markets.
Making adjustments to the financial markets and correcting the pace of infrastructure spending might mean slower growth in the near term, the I.M.F. has said. But it might mean more sustainable growth in the long term, with substantial benefits not just for China but also for global growth.
That message was delivered as the Chinese economy is already slowing considerably; growth has fallen to an annual pace of about 7.5 percent, down from a peak of more than 14 percent in 2007, before the global financial crisis.
More broadly, the emerging market economies that helped pull the world out of the global recession have cooled, dragging the global growth rate down with them. Growth remains sluggish in the United States, and much of Europe is mired in a recession.
“Growth in emerging market economies will remain high, much higher than in the advanced economies, but may be substantially lower than it was before the crisis,” Olivier Blanchard, the chief economist for the I.M.F., said at a news briefing this month.
Top Chinese policy makers are aware of the issues that the I.M.F. and other analysts have raised, and they generally agree. They have in part engineered the recent economic slowdown and have shown a willingness to make changes. But few details are available about how the new Chinese government might move to revamp the economy. More information is expected after a major Communist Party meeting this fall.
The fact that China’s population is aging — and its labour force gradually shrinking — adds to the pressure for a structural overhaul.
The authorities say they aim to raise domestic consumption and productivity, reduce China’s reliance on exports and construction investment, and rein in financial risks flagged in the I.M.F. report. But many entrenched interest groups, including state-owned enterprises, public banks and midlevel officials who run huge sections of the economy, are more comfortable with the status quo.
In recent weeks, China’s government has made it increasingly clear that it is prepared to tolerate slower growth and that it will not repeat the aggressive stimulus that followed the global financial crisis.
Prime Minister Li Keqiang reiterated that message in comments reported by the official Xinhua news agency on Wednesday. Although he acknowledged that the economy faced risks and challenges, Mr. Li said it remained “generally stable.”
While the authorities must work to “keep economic growth within a reasonable range,” they will aim to deploy “targeted” policies and “not change the direction of policies based only on temporary changes in economic barometers,” he said, according to Xinhua.
In a note referring to Mr. Li’s comments, Qu Hongbin, chief China economist at HSBC in Hong Kong, wrote, “Beijing is trying to boost public confidence and emphasise the seriousness of its intention by reiterating the need to stabilise growth.”
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