The IMF recently published its annual review of the world’s second largest economy. The assessment comes at a notable moment in time, with President Xi Jinping finishing his first term this fall, thereby adding more weight to reflection on past and future performance.
The time has now come for China to prioritize reform, in order to harness the nation’s medium term growth potential and avoid future economic instability. In this interview, James Daniel, China mission chief at the IMF, discusses his Article IV China report.
Maurits Elen: Last year, the IMF urged China to communicate better. Could you explain if there has been improvement?
James Daniel: We have consistently urged Chinese policymakers to communicate their policies better, so that their policies can be more effective and markets less volatile. This has not fallen on deaf ears — Chinese policymakers themselves increasingly recognize the importance of improving their communications. Indeed, many parts of the government have significantly stepped up their communications. For example, following the annual National Party Congress in March, many government agencies now regularly hold press conferences. There has also been an increased effort to publish more information in English — critical as China becomes increasingly globally integrated. However, as we highlight in our just-published annual report on the Chinese economy, there remains considerable scope to improve communications further.
What is driving the IMF’s growth forecast of 6.7 percent and could you elaborate on the quality of growth in China, looking at employment, wages, and private consumption figures?
Our projection of 6.7 percent growth for 2017 reflects the strong outcome of the first half of the year, continuing momentum and the pick-up in international trade. It also reflects robust employment, wage, and private consumption growth. And we project growth to remain strong over the medium term. Our concern is with the quality of growth — specifically, that achieving these strong growth rates relies excessively on credit and investment. Which, in our view, is unsustainable and risky. But we also think China has the potential to safely sustain strong growth over the medium term by accelerating reforms.
China is urged to accelerate its reform program. What exactly needs to be accelerated and why?
The two most important components that we highlight are:
First, to increase social spending — so consumption can drive growth rather than credit-intensive investment.
Second, to reduce support to state-owned enterprises (SOEs) and open up more to the private sector — so market forces can boost the economy’s productivity.
Growth is forecast to be 6.4 percent on average between 2018 and 2020. What is behind the lower growth and has your growth projection already weighed in the possible downward pressure caused by reform acceleration and financial deleveraging?
Although we project growth to remain strong over the medium term, we do project it to decline gradually, reflecting slowing productivity growth. This reflects continuing, but accelerating, reform. It also envisages continuing strong growth of credit to firms, households and the government. Accelerating reform would likely weaken growth in the short term, but would make it stronger and safer in the longer term.
How does China’s slower growth in the coming years fit into the global growth story?
Even at somewhat lower growth rates, China will continue to be a pillar of global growth. We expect China’s role in the global economy to increase in the longer term. China still has many years of strong catch up growth ahead and is still to fully open its capital account. What is critical is that the Chinese government continues to pursue reforms that rebalance the economy in a more sustainable direction. If such rebalancing is successful, China’s greater role in the world economy will take care of itself and benefit the global economy as a whole.
Inflation in China has remained well below 2 percent in 2017, thereby providing space for monetary easing for when growth falters too much. But China is also facing rising debt, and in this vein, has been slowly increasing short term interest rates as it would move some firms into deleveraging. What is your take on monetary policy in China?
Inflation has indeed been relatively low in 2017. But “underlying” inflation has, at least until recently, been picking up and we see the overall stance of monetary policy as accommodative. Our advice is to gradually reduce this accommodation (i.e. increase interest rates) if core inflation continues to pick up. Moderately higher inflation could also help reduce debt, but interest rates should not be the primary tool for tackling financial stability concerns, which are better addressed directly with financial sector or structural policies.
Proactive fiscal policy can boost growth, but can also cause higher budget deficits and debt-to-GDP ratios. In China, the augmented general government budget deficit is estimated to have been 12.5 percent of GDP in 2016, according to IMF figures. With growth being slower in the next years, how to approach fiscal policy?
While we see a need to gradually reduce the “augmented” deficit, we see improving the composition of fiscal policy as more urgent. This would help make growth more sustainable and safer. In particular, we recommend increasing spending on health, education, and social security, while reducing infrastructure investment. On the revenue side, we recommend relying less on land sales and social security contributions in favor of higher personal, property and environmental taxes, as well as increasing dividends from SOEs.
This interview has been edited for clarity.