China must speed up economic reforms while it still has a buffer of stable growth, the International Monetary Fund warned in its annual review of the world’s second-largest economy.
“Reform progress needs to accelerate to secure medium-term stability”, and to lower the risk of a “sharp adjustment”, the IMF said in its Article IV report on Wednesday.
However, the IMF acknowledged that “some near-term risks had receded” as a result of continuing tightening in the financial and housing markets.
The IMF forecast China’s gross domestic product to grow 6.7 per cent this year — edging up from a previous estimate of 6.6 per cent — falling to 6.4 per cent between 2018-20, in line with government forecasts.
However, the IMF warned that steady growth required “deep reforms to transition from the current growth model that relies on credit-fed investment and debt”, according to David Lipton, IMF first deputy managing director.
China’s growth has been largely driven by investment, but this has started to slow because of declines in infrastructure and property investment. Official figures released on Wednesday show that annual growth in infrastructure fixed-asset investment dropped 4.3 percentage points in May, while property investment growth dropped 2.3 percentage points — meaning that growth in overall fixed-asset investment slowed in May to 7.8 per cent year on year.
Beijing has made containing financial risk a priority this year, fearing bubbles in its financial and housing markets. Regulators have clamped down on speculative activity and have reined in institutions from insurance companies to property developers.
“No one knows for sure how long China has to reform. But China needs to do so otherwise the rate of return [on capital] is going to keep dropping,” said Larry Hu, of Macquarie Capital.
Local governments have launched a slew of measures to restrain housing demand in major cities, prompting prices to stall or drop and sales to plummet. Property developers have had their funding channels squeezed.
“The recent measures in the financial and property markets don’t count as reforms, but as tightening,” added Mr Hu. “They will for sure lower short-term risks, but the long-term risks are still there.”
In its continuing crackdown against corruption and risky investment, the government has been unafraid to target high-profile financiers such as the chairman of the insurance company Anbang, who was recently taken into detention. Some of the country’s largest insurance companies have had their issuance of risky products suspended. The new banking regulator has launched a “regulatory windstorm” against the country’s vast shadow banking industry.
The credibility of China’s economic data also needs to be improved to meet the country’s international commitments, the IMF said. Economists worldwide have long criticised China’s official economic statistics for being manipulated and thus giving little guidance for foreign stakeholders.
In particular, China’s official growth and employment figures are suspiciously stable, showing barely any sign of the volatility that has affected the country’s economy.
After the province of Liaoning in the country’s north-eastern rust belt admitted it had falsified fiscal data, the central government has accused two more provinces in northern and north-eastern China of faking their economic data earlier this week.
Source: ft.com
