IMF Concludes 2021 Article IV Consultation with People’s Republic of China

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with the People’s Republic of China.

China’s recovery is well advanced, but it lacks balance and momentum has slowed. The slowdown is attributed to the rapid withdrawal of policy support, the lagging recovery of consumption amid recurrent COVID-19 outbreaks despite a successful vaccination campaign, and slowing real estate investment following policy efforts to reduce leverage in the property sector. GDP growth is projected at 7.9[2]percent in 2021 and 4.8 percent in 2022, with the deceleration in 2022 partly reflecting the fading of base effects, while subdued private consumption and real estate investment are adding headwinds. As a result, significant slack in the economy is expected to remain in 2022 with core CPI inflation projected to stay subdued and below the target of about 3 percent. The current account surplus is expected to narrow in 2022 to 1.5 percent of GDP from 1.8 percent in 2021 as demand for pandemic-related exports normalizes.

The significant tightening of macroeconomic policy support has added to the slowing growth momentum. Fiscal policy turned strongly contractionary at the beginning of 2021, reflecting policymakers’ shifting focus away from supporting the recovery to deleveraging. The withdrawal largely represented decreases in public investment, although some targeted fiscal support continued, including select tax and fee cuts for small firms. The augmented general government primary deficit (including estimated off-budget spending) is projected to have decreased from 19.4 percent of GDP in 2020 to 15.4 percent in 2021. Monetary policy tightened moderately compared to 2020, as key money market rates increased relative to their pandemic lows, and overall credit growth slowed in 2021 despite the continuation of structural credit policies to steer bank credit to small firms.

Structural reforms-a requisite for China’s transition to high-quality growth, growth that is balanced, inclusive and green-have progressed unevenly across core areas. While China’s climate strategy has begun to take shape with the release of detailed action plans, there was little or no progress in key real-sector reforms, including in the area of state-owned enterprises and competitive neutrality between private and state-owned firms. A wave of regulatory policy measures targeting technology sectors, while intended to strengthen competition, consumer privacy, and data governance, has increased policy uncertainty that has been further heightened by the financial stress faced by large property developers following policy efforts aimed at deleveraging.

Executive Board Assessment[3]

Executive Directors highlighted that China’s recovery from the COVID-19 shock is well advanced thanks to the strong and swift policy actions taken by the authorities, including the high vaccination rate. Noting that the recovery has slowed and remains unbalanced and subject to risks, Directors called for continued appropriate policies that support the economy and its rebalancing and for progress in key structural reforms to transition to “high-quality”-balanced, inclusive, and green-growth.

Directors generally agreed that fiscal policy should support the recovery. In particular, they recommended that fiscal support further strengthen social protection, which would reduce households’ precautionary savings, promote a rebalancing toward consumption and the services sector, and facilitate the transition to high-quality growth. Directors also supported an accommodative monetary policy given currently low core CPI inflation and the still-negative output gap. In this context, some Directors agreed that the current monetary policy stance should be maintained, while some others saw room for further easing. Directors encouraged further modernization of the monetary policy framework and greater exchange rate flexibility . Some Directors also noted the benefits of further improving the transparency of foreign exchange interventions and the central parity formation for the daily trading band.

Directors agreed that to sustain growth going forward, it will be essential to lift productivity by re-accelerating key real-sector reforms. They underscored the importance of further opening up domestic markets, enhancing corporate governance, and ensuring market neutrality between private firms and state-owned enterprises (SOEs). Most Directors also recommended that these reforms be accompanied by the removal of implicit guarantees for SOEs. However, a few Directors noted the authorities’ view that SOEs are separate commercial entities and bear potential legal and financial consequences on their own. Directors agreed with the authorities on the importance of enhancing fair competition, consumer privacy, and data governance. In this context, they recommended that regulatory measures, including those targeting the technology sector, be implemented in a transparent and predictable manner to reduce policy uncertainty . Directors also emphasized the importance of addressing macroeconomic data gaps. They noted the progress made in developing a digital fiat currency, e-CNY.

Directors welcomed the authorities’ efforts to reduce financial vulnerabilities. They emphasized the importance of guarding against risks in the property sector by strengthening monitoring, transparency on risk exposures, and policy coordination and communication. Directors also recommended adopting macroprudential and structural measures to reduce longer-term risks in property markets. They welcomed the authorities’ ongoing efforts to address high corporate leverage and encouraged them to strengthen market-based insolvency and resolution frameworks.

Directors welcomed that China’s climate strategy has begun to take shape and the milestones recently introduced. Noting the plans to reach peak carbon emissions by 2030, most Directors agreed that accelerating decarbonization efforts would save costs and reduce risks of delays in achieving carbon neutrality by 2060. A few Directors supported a more gradual decarbonization path, including to ensure a balance between climate objectives and energy security. Directors recommended relying on a comprehensive approach that combines economic rebalancing toward a more consumption-based growth model coupled with the use of carbon pricing tools and leveraging green finance.

Directors welcomed China’s continued role in the global fight against the pandemic, including facilitating access to vaccines. They also welcomed China’s rechanneling of part of its SDRs to support the recovery of low-income and vulnerable countries. Directors underscored that China has a key role in the multilateral efforts to address global challenges, including timely and full implementation of the G20 Common Framework for debt treatment to put the debt of low-income countries on a sustainable footing; climate change to help the world secure a broad-based, green recovery; and contributing to building a more open, stable, and rules-based international trade system.


[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2]The data presented in the Press Release is based on information as of December 15.

[3]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

China: Selected Economic Indicators 1/

20162017201820192020202120222023202420252026

Projections

(Annual percentage change, unless otherwise indicated)

NATIONAL ACCOUNTS

Real GDP (base=2015)

6.96.96.86.02.37.94.85.25.15.04.9

Total domestic demand

7.96.87.45.31.77.35.05.45.35.15.0

Consumption

8.47.27.96.3-0.89.85.15.85.45.65.4

Investment

7.36.36.84.05.14.24.94.95.24.54.5

Fixed investment

7.46.27.35.34.63.75.15.05.44.74.7

Inventories (contribution)

0.00.1-0.2-0.50.30.20.00.00.00.00.0

Net exports (contribution)

-0.80.3-0.50.70.60.8-0.10.00.00.00.0

Total capital formation (percent of GDP)

42.743.244.043.143.142.542.542.342.141.841.4

Gross national saving (percent of GDP) 2/

44.444.744.143.845.044.144.043.743.442.842.2

LABOR MARKET

Unemployment rate (annual average) 3/

5.05.04.95.25.24.9

Employment

-0.1-0.2-0.4-0.4-0.5-0.2-0.2-0.2-0.2-0.2-0.2

PRICES

Consumer prices (average)

2.01.62.12.92.41.01.61.62.02.02.0

GDP Deflator

0.93.93.52.11.22.01.51.72.11.82.0

FINANCIAL

7-day repo rate (percent)

2.75.43.13.12.6

10-year government bond rate (percent)

3.03.93.33.23.2

Real effective exchange rate (average)

-4.8-2.91.4 -0.72.1

Nominal effective exchange rate (average)

-5.4-2.51.5-1.80.9

MACRO-FINANCIAL

Total social financing

30.514.110.310.713.310.59.48.48.27.97.7

In percent of GDP

241.9248.4247.9253.7277.6278.7286.7290.4292.9295.5297.6

Total non-financial sector debt 4/

16.814.410.810.813.210.69.88.78.48.07.8

In percent of GDP

240.5247.5248.2254.3277.9279.2288.1292.8295.9299.0301.2

Domestic credit to the private sector

12.411.68.39.09.67.26.85.76.16.06.4

In percent of GDP

168.0168.8165.5166.7176.5171.9172.6170.4168.5167.1166.2

House price 5/

11.35.712.38.67.54.92.03.03.54.04.0

Household debt (percent of GDP)

44.748.952.355.861.662.763.264.264.765.666.4

Non-financial corporate domestic debt (percent of GDP)

123.3119.9113.2110.9114.9109.3109.4106.1103.8101.599.9

GENERAL BUDGETARY GOVERNMENT (Percent of GDP)

Net lending/borrowing 6/

-3.7-3.8-4.7-6.3-11.2-7.9-8.1-7.6-7.6-7.6-7.6

Revenue

28.227.828.327.825.325.825.525.525.525.525.5

Additional financing from land sales

2.02.52.82.93.33.02.82.62.42.32.1

Expenditure

33.934.235.837.039.836.636.435.735.635.435.2

Debt 7/

36.736.236.538.545.447.350.653.255.557.859.9

Structural balance

-3.4-3.6-4.5-6.0-9.9-7.4-7.6-7.2-7.3-7.4-7.5

BALANCE OF PAYMENTS (Percent of GDP)

Current account balance

1.71.50.20.71.81.61.51.41.31.00.8

Trade balance

4.43.92.72.73.53.02.72.93.02.72.5

Services balance

-2.1-2.1-2.1-1.8-1.0-0.7-1.0-1.6-1.8-1.9-2.0

Net international investment position

17.716.815.216.014.513.814.014.314.514.514.2

Gross official reserves

(billions of U.S. dollars)

3,0983,2363,1683,2233,3573,4483,6963,9764,2804,5604,846

MEMORANDUM ITEMS

Nominal GDP (billions of RMB) 8/

74,59882,89891,57799,071102,592112,919120,122128,548137,914147,419157,694

Augmented debt (percent of GDP) 9/

66.673.076.681.695.7101.6109.9116.7121.8126.2129.3

Augmented net lending/borrowing (percent of GDP) 9/

-15.9-13.5-11.8-12.6-19.9-16.5-16.3-15.7-14.7-14.0-13.0

Sources: Bloomberg; CEIC: IMF International Financial Statistics database; and IMF staff estimates and projections.

1/ Historical data up to date as of December 15, 2021.

2/ IMF staff estimates for 2020.

3/ Surveyed unemployment rate.

4/ Includes government funds.

5/ Average selling prices estimated by IMF staff based on the data of national housing sale values and volumes published by the National Bureau of Statistics.

6/ Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general budgetary government balance, including government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.

7/ The estimation of debt levels assumes zero off-budget borrowing from 2015 to 2026.

8/ Production side nominal GDP.

9/ The augmented balance expands the perimeter of government to include government-managed funds and the activity of local government financing vehicles (LGFVs).

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