The directors pointed out that the external environment was still uncertain, and stressed that in order to successfully realize the transition from high-speed growth to high-quality growth, we should continue to implement deleveraging and strengthen rebalancing. Jin Zhongxia, Executive Director of IMF China, told First Financial Journalist: It is expected that the positive effect of fiscal stimulus will be further demonstrated in the second half of this year. We agree with the staff. Given that the government has taken external factors into account in this years budget preparation, there is no need for large-scale fiscal stimulus at present.
The IMF also mentioned the need for additional targeted stimulus measures, mainly fiscal measures, if the external environment is further strained and economic and financial stability is at risk. The IMF does not recommend further monetary easing.
As usual, the IMFs assessment proposals differ slightly from Chinese views.
(Images from IMF reports)
Economic growth will be in a reasonable range
The IMF said that China was still in the early stage of productivity convergence and therefore expected to maintain strong growth in the medium term; however, as the economy moves further from the industrial sector to the service sector with lower productivity, growth may slow down gradually, because industrial productivity is about 1.3 times that of the service sector.
In response, Jin Zhongxia said that Chinas GDP growth slowed from 6.4% in the first quarter of this year to 6.2% in the second quarter, but the economic growth was very resilient, and the structural adjustment of Chinas economy has begun to achieve results. The contribution of consumption expenditure to GDP growth has increased to more than 60%, and the share of service industry in the economy has increased to 52.2%, more than 40.7%. The proportion of manufacturing industry. In 2019, China is confident of achieving growth of 6% to 6.5%.
Staff members pointed out in the report that Chinas labor productivity still lags far behind that of developed countries and is in the first half of convergence, which is conducive to Chinas strong economic growth in the medium and long term. We deeply agree with this. Chinas urbanization rate has steadily increased, once high housing inventory has dropped to a new low. China has invested a lot in infrastructure in the past few decades, but there are still gaps in terms of density and per capita, which still have great potential. Jin Zhongxia said.
The World Investment Report 2019 issued recently by the United Nations Conference on Trade and Development (UNCTAD) shows that despite some unfavorable factors, such as the shrinking of global FDI and the impact of trade frictions, FDI in China increased by 4% in 2018, and China remains the second largest foreign capital inflow country in the world. In 2018, Chinas portfolio inflows reached a record high. The IMF estimates that the inclusion of Chinese A shares in MSCI and bond markets in the Bloomberg Barclays Global Composite Index could lead to further capital inflows of about $450 billion.
Fiscal Policy and Exchange Rate Elasticity as Priority Tools for Risk Prevention
In order to stabilize the economy under the rising external uncertainties, and at the same time continue to promote balanced and sustainable growth, how should the macro-policy deal with it?
The IMF recommends that China avoid additional stimulus measures and excessive credit growth. Given that the planned stimulus measures are sufficient to ensure stable growth in 2019 and 2020, no additional stimulus is required. However, considering the risk of uncertainty in the external environment, fiscal measures should wait for the external environment to become clearer. Policy space should be used to offset the negative impact of the necessary structural reforms, rather than to achieve excessive growth goals.
It is noteworthy that the IMF said it would not recommend further easing of monetary policy because the actions taken are very adequate and are still conducting and core inflation remains stable. The IMF suggests that exchange rate flexibility should be strengthened to facilitate adjustment to adapt to the new external environment. At the same time, further opening of capital account should be carried out cautiously and orderly and ensure its pertinence. The IMF believes that China has made progress in reducing external imbalances. The exchange rate level in 2018 is basically in line with the economic fundamentals, that is, the RMB has not been substantially overvalued or undervalued. We recommend that Chinas exchange rate be more flexible, and progress has been made so far. We hope this will continue. Daniel said.
In this regard, the Chinese side agrees that, in view of the fact that the government has taken factors such as external environment into account in this years budget preparation, there is no need for large-scale fiscal stimulus at present.
However, the difference is that IMF staff in the Debt Sustainability Analysis said that Chinas debt situation is not as good as last year, debt sustainability is at risk. In response, Kim said that we believe that the recent rise in debt rates reflects short-term factors rather than long-term trends, and the authorities are still committed to stabilizing the overall leverage level. The high savings rate should be taken into account in the analysis of national debt. High savings rate is the symbol of Chinas successful large-scale mobilization of domestic resources. It makes cross-generational resource allocation and capital accumulation in China not dependent on external financing. Large-scale financing based on high savings also meets the needs of balance of payments on the whole. There are some limitations in the way that staff use the ratio of debt to GDP to analyze debt sustainability. This analysis confuses the concepts of stock (debt) and flow (GDP), and it is difficult to accurately measure debt sustainability in China. Staff members are advised to pay the amount of debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts/debts
Measuring GDP and total debt/national wealth may lead to a more accurate conclusion on Chinas debt sustainability.
(Images from IMF reports)
In response to monetary policy, Jin Zhongxia said that China continued to pursue a sound monetary policy, adjusted its policies in the light of domestic and foreign economic situation and price trends, and used a variety of monetary policy tools to maintain liquidity and a reasonable and abundant money supply. The Peoples Bank of China will continue to deepen the market-oriented reform of interest rates so that policy interest rates can better guide market interest rates. At the same time, the Peoples Bank of China will further promote the transformation of monetary policy framework from quantitative to price-oriented, and constantly improve the formation and transmission mechanism of market-oriented policy interest rates.
Strengthening Financial Stability and Bank Capital
Specifically, the IMF recommends that China promote further shrinkage of shadow banking, encourage the transfer of these assets to bank balance sheets, and improve monetary policy transmission. Finally, the framework of domestic systemically important banks and systemically important financial institutions is established, including the implementation of additional capital requirements. Incentives to retain profits and tax incentives for raising equity from non-bank sources (such as corporate equity tax cuts) are better than increasing capital through cross-holding of sustainable bonds by banks, because cross-holding of bonds increases interconnectedness and may exacerbate systemic risks.
The recent takeover of the contractor bank and the participation of strategic investors in Jinzhou Bank reflect the efforts of the authorities to continue to clean up, consolidate and strengthen some small and medium-sized banks. Over the past few years, many small and medium-sized banks have become more robust by actively replenishing capital, dealing with bad debts and substantially increasing reserves, which is consistent with the recommendations of the IMF in its financial stability assessment report on China. Jin Zhongxia said.
Accelerating Financial Opening and State-owned Enterprise Reform
The IMF commends China for further promoting financial openness, and also recommends that China speed up and strengthen the reform of state-owned enterprises. The IMF noted that some reforms have improved the dominance of state-owned enterprises. For example, the treatment of zombie central state-owned enterprises has basically been completed, but mainly comes from mergers and acquisitions of other state-owned enterprises rather than bankruptcy. As a result, the number of state-owned enterprises has decreased, but on a larger scale.
In this regard, Jin Zhongxia said that at the level of central enterprises, the disposal of zombie enterprises has been completed about 95%, striving to complete the task in an all-round way this year. More than one third of the disposed zombie enterprises are disposed of by bankruptcy, while the others are mainly disposed by mergers and acquisitions and internal restructuring. Not long ago, the National Development and Reform Commission and other departments jointly formulated a plan to promote the bankruptcy and withdrawal of state-owned zombie enterprises. For state-owned enterprises that meet the conditions of bankruptcy and other withdrawal, the relevant parties shall not hinder their withdrawal in any way. At the same time, it is stipulated that the central and local governments shall not provide government subsidies and loans through irregularities. To maintain the survival of enterprises with no viability in other ways.
At present, Chinas private enterprises support more than 80% of employment and create more than 60% of GDP. Private enterprises and foreign-funded enterprises account for more than 90% of Chinas exports. The Chinese government has promised to create a fair competition environment for all types of enterprises and put the principle of competition neutrality into practice. No matter state-owned enterprises or private enterprises, domestic or foreign capital, they all compete fairly at the same starting line.
In addition, China also welcomed the IMF staffs research on improving credit allocation in Chinese enterprises, and thanked them for providing some national experience related to eliminating explicit guarantees for state-owned enterprises. However, Jin Zhongxia said that these national experiences are aimed at eliminating explicit guarantee rather than implicit guarantee. Staff members need to be very cautious in defining and quantifying Chinas implicit guarantee because it is often based on guesswork rather than conclusive facts. China explicitly prohibits any form of unauthorized guarantees by the government to enterprises.
As the IMF staff report points out, in recent years, there have been more defaults on state-owned enterprise bonds in China. In some specific periods, the number of defaults on state-owned enterprise bonds is even higher than that on private enterprise bonds, which is inconsistent with the assumption that staff membersimplicit guarantee exists widely. Staff believe that the low financing cost of state-owned enterprises is the evidence of the existence of implicit guarantee, which in practice is too simple and arbitrary to judge the risk. Are the low financing costs of large financial institutions and automobile manufacturers in some developed countries, which were rescued by the government during the financial crisis or had been partially owned by the government, reflecting implicit guarantees? Jin Zhongxia said that China encourages staff to study the issue more comprehensively and make cross-country comparisons to test whether this quantitative method of estimating implicit guarantee can withstand scrutiny and apply the same criteria to all member countries.