The International Monetary Fund increased its estimate for China’s average annual growth rate through 2020, while warning that it would come at the cost of rising debt that increases medium-term risks to growth.
China’s economy will expand at an average pace of 6.4 percent annually from 2017 through 2020, compared with a 6 percent estimate a year earlier, the IMF said in its Article IV review. Household, corporate and government debt will increase to almost 300 percent of gross domestic product by 2022 from 242 percent last year, fund staff estimated.
President Xi Jinping has been pushing financial regulators to address excessive borrowing at state enterprises and has said their indebtedness is “the priority of priorities.” But ending the addiction to debt requires measures that include allowing companies to fail and sweeping shifts in the way capital is allocated that policy makers have yet to fully embrace.
“Given strong growth momentum, now is the time to intensify these deleveraging efforts,” the IMF said. “Reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment.”
Lending to the private sector rose 16 percent in 2016, twice the pace of nominal GDP growth, and since 2008 has risen about 80 percentage points to about 175 percent of output, the fund said. Such large increases in other countries have been associated with sharp growth slowdowns and often financial crises, it said. IMF staff estimated that a healthier pace of credit growth would have kept real GDP growth around 5.5 percent from 2012 to 2016, rather than 7.25 percent.
China is transitioning to more sustainable growth, as reforms are advancing widely, policy makers have taken initial steps to facilitate private-sector deleveraging and credit growth and corporate debt are both increasing more slowly, the IMF said. Progress also has been made on reducing excess industrial capacity, strengthening local government borrowing policies, and addressing financial sector risks, it said.
Expansion is expected to remain unchanged this year at 6.7 percent owing to momentum from last year’s stimulus, the IMF said. Inflation also is seen unchanged from a year earlier at 2 percent this year, it said. The future objective should be for policy makers to focus more on the quality and sustainability of growth and less on quantitative targets, it said.
With the spotlight on trade tensions as U.S. President Donald Trump mulls a probe of how China handles intellectual property, the IMF report had some positive news for Beijing.
China’s current account surplus, seen by many economists as a better measure than the merchandise trade surplus, fell almost 1 percentage point to 1.7 percent of GDP last year on stronger domestic demand, the IMF said. It’s forecast to fall to 1.4 percent of GDP this year.
The narrower surplus was driven by a sharp recovery in imports and continued strength in tourism outflows, the IMF said. It added that data limitations suggest tourism imports may be overstated by half a percentage point of GDP and said the surplus is still “moderately stronger” than is consistent with China’s medium-term fundamentals. The yuan remains broadly in line with fundamentals, the report said.
For more sustainable growth, China must boost consumption and reduce its high savings rate in part by spending more on health care and pensions, the IMF said. At 46 percent of GDP, China’s national savings rate is more than double the global average, it said.
China also needs to increase productivity, which can be done by better use of resources being allocated to unprofitable “zombie” companies, overcapacity industries and state-owned enterprises, the report said. It estimated that better allocation could increase the contribution of productivity to growth by 1 percentage point over the long term. Bloomberg
