China’s Growth Robust But Risks Are Rising, Says IMF

(Bloomberg) -- The near-term outlook for China’s economy is robust but external threats have risen and overall risks are tilted to the downside, according to the International Monetary Fund.

What happens with the world’s second-largest economy from now will depend on how China’s government acts, the IMF said in a report after regular consultations with the Chinese government. Market-based reforms could lead to sustained, stable growth, but "a reversion to credit-driven stimulus would further increase vulnerabilities that could eventually lead to an abrupt adjustment," the Fund said.

The Washington-based IMF’s warning comes as Beijing signals that it is prepared to soften a campaign to rein in debt in order to support the economy at a time when a trade conflict with the U.S. is intensifying. Second-quarter output data released this month showed that Asia’s biggest economy is slowing, though it’s still on track to hit an official growth target of 6.5 percent for 2018.

The government needs to resolve the policy tensions between the stated aims of “stabilizing leverage, allowing market forces a decisive role, and greater innovation and opening-up” and the “still-unsustainable debt growth, the pervasive role of the state in the economy, and the relatively restrictive trade and investment regime in some areas.”

The Fund argued that there is some space for fiscal policy to support the economy as deleveraging takes place. The central bank should also gradually tighten monetary policy, which is still accommodative.

The IMF said that Chinese authorities disagreed with their description of monetary policy, arguing that it was "neutral given stable growth, inflation and unemployment, and slowing credit expansion."

Beijing appears to have listened to the argument for more government spending, announcing new fiscal support for tax cuts, more infrastructure spending and other projects last week. But that shift may temper some efforts to clean up the nation’s giant debt pile, notwithstanding pledges to avoid strong stimulus.

De-risking in the financial system would likely weigh on gross domestic product growth, and the authorities "will likely need to maintain strong credit growth to meet their growth targets, which would come at the cost of further increases in nonfinancial sector debt."

A more decisive move to resolve the policy tensions and focus on higher-quality growth and a greater role for the market would weaken near-term growth but make longer-term growth stronger and more sustainable, the Fund’s staff wrote.

The Chinese authorities broadly agreed on the outlook for growth, but had a more sanguine view on debt and associated risks, the report said.

Beijing sees downside risks in the near- to medium-term as mostly external in nature, including heightened trade tensions with the U.S., the global rise in protectionism, and market volatility stemming from faster-than-expected U.S. policy normalization and a sharp rise in the dollar, the Fund said. China said leverage had stabilized and shouldn’t pose major risks, the report added.

To contact the reporter on this story: James Mayger in Tokyo at jmayger@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Paul Jackson

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