BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/34
The staff report repeatedly stresses the importance of rapidly advancing structural reform essential to raising China’s growth potential. Important reforms include moving to a more market-based financial system, reforming state-owned enterprises and taking action to improve the competiveness and investment efficiency of the private sector. The IMF reiterated its wish that China move to a floating exchange rate regime within two to three years.
The IMF considers the latest trend of slower growth of credit (particularly evident in the shadow banking sector and real estate investment) a positive step. The IMF said that economic resilience would have to come from reducing the debt-to-GDP ratio and excess supply in real estate markets. The staff praised China’s new budget act, aimed at helping local governments reduce off-budget borrowing. Financial market reforms have proceeded as expected. GDP is generated increasingly by labour-intense activities, having a positive impact on the labour market trends.
The IMF assessment assumes China will succeed in invigorating its economy and advancing economic reforms. GDP growth should come in at 6.8 % this year, 6.3 % next year and 6 % in 2017. Under the base scenario, economic growth will then cease to slow as the positive effects from reform begin to be felt.
The IMF emphasised that rising economic vulnerabilities need to be addressed immediately. One of the biggest risks is that economic reforms will move too slowly as China clings to its old growth paradigm. Failure to embrace change could seriously impair growth over the long run and hurt the global economy.