This year marks the 40th anniversary of China’s opening up. A new reform era has also begun, with President Xi Jinping having shared the ambition to create a modern socialist country by 2035. For now, focus is set on three important reform areas: social spending, state enterprises, and deleveraging.
Despite positive recent progress, it will take time before authorities can deliver convincing results – there is still much room for improvement. In this interview, James Daniel, mission chief for the IMF in China, discusses his Article IV report.
Maurits Elen: How do you look back on 40 years of reform?
James Daniel: The policy of reform and opening up has lifted China from one of the poorest countries in the world to now an upper-middle-income country and world’s second largest economy, pulling some 800 million people out of poverty.
From a personal point of view during my time working on China that started in 2015, I have been most impressed by actions taken to tackle China’s dangerous credit boom. When I started, banks were expanding their assets by about 15 percent a year — which is unsustainably fast — [but that has dropped] to about 7 percent currently, a much safer growth rate. And this was done without substantially reducing overall economic growth.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
To what extent has China effectively re-balanced this year?
In our annual report released in July, we assessed rebalancing progress during 2017. We found mixed progress. On the positive side, growth became less dependent on credit and investment, the excessively large current account surplus moderated, and there was some improvement in air quality and energy efficiency. On the negative side, growth relied relatively more exports and less on consumption, and income inequality, one of the highest in the world, stopped falling.
Some of these trends have reversed so far in 2018, but one should not read too much into a couple of quarters.
President Xi Jinping has pledged to make growth more inclusive and spend more on social programs. Has a move into this direction been made?
We at the IMF, among others, have pointed out that there is considerable scope to improve the inclusiveness of growth in China. For example, China has one of the most unequal income distributions in the world.
We thus very much welcome the Chinese government’s increased focus on inclusive growth. This will not only allow the average citizen to more greatly benefit from China’s development but will also make country’s development more lasting and sustainable.
While spending on social programs has increased, it is too soon to tell whether growth has become more inclusive. We recommend additional policy actions, such taxing more heavily those with higher incomes and expensive properties.
Great strides have been made to derisk the financial sector, but no deleveraging of the real economy has taken place. When do you expect to start to see this?
Indeed, while the pace of credit growth to the real economy has slowed significantly, it is still somewhat faster than the growth of the real economy. Thus, we would not say there has been deleveraging, but that leverage is growing more slowly.
We do not expect to see deleveraging in the next few years, though the pace of increase of leverage is likely to slow further.
Achieving deleveraging will likely require further policy effort. In particular: hardening budget constraints on state-owned enterprises (SOEs) and local government investment financing, staying the course in strengthening financial regulations, tightening controls over household borrowing, and accepting the resulting slowdown in GDP growth.
We have seen 40 years of opening up, but China’s market is still relatively restricted. How long do you think China will take to be truly open up to the global economy?
We view further opening up as critical for China to continue to grow strongly, especially as other sources of growth, such as investment, are naturally weakening.
We are encouraged by recent progress in opening up, in particular, in the financial sector.
But whether China does become fully open to the global economy depends on how much the Chinese government wants to allow foreign firms to participate on equal terms with Chinese firms, and in particular, SOEs. For example, the telecommunications sector is still largely off limits for foreign firms.
You recently visited the city of Shenzhen, which is a testing ground for private sector reform. Is this city’s success story unique or do you think its private sector model can easily be emulated elsewhere?
When part of our team visited Shenzhen earlier this year, they found Shenzhen to be remarkably dynamic and prosperous, driven by the private, not the public, sector. We think allowing a greater role for the private sector would support growth not just in Shenzhen, but also in all of China.
This interview has been edited for clarity.