"Cautiously optimistic" still seems to be the overall position of the latest IMF review on the Chinese economy and its reform towards a sustainable growth path. Typically annually, the IMF holds bilateral discussions with its members under Article IV and last Friday they published this 123 page report covering reforms, concerns, expectations and suggestions - summarising the ongoing top-level dialogue and three and a half week intense discussions that took place during May-June.
The analysis continues the broadly positive perspective from last year’s report regarding continuing reforms and policy announcements building upon decades of economic growth that has lifted some 600m people out of poverty. However the latest report accounts for the obstacles that have become all the more apparent over the past 12 months which have impeded implementation and slowed progress in key structural reforms such as budget constraints for SOEs to the excessive corporate debt levels. Concurrently, praise was given for China’s ‘impressive progress on structural reforms in many areas, notably interest rate liberalization, internationalization of the renminbi, urbanization… and economic rebalancing.’ Even since the discussions important reforms continue such as last week’s establishment of a specialised bankruptcy tribunal to facilitate corporate restructurings. Furthermore in just over six weeks’ time we will see the implementation of the Chinese renminbi’s inclusion into the SDR alongside a SDR 2bn bond issuance via the China Interbank Bond Market (CIBM) - which could be the start of a resurgence in demand for private SDR denominated securities.
The report details a number of credible concerns, the IMF’s suggestions and the Chinese authorities view (consistently a little more sanguine) as well as IMF proxy calculations for data such as their ‘augmented’ debt and fiscal balance figures which include a useful estimation of off-budget borrowing (often local government) and land sales. In addition to corporate debt and SOE reforms, financial shocks from risky wealth management products and property – where unsold inventories in smaller (Tier 3 and 4) cities amount to around three years of sales – are other important risks that require monitoring.
The IMF’s baseline scenario remains benign for the short term but weaker over the medium term with GDP growth steadying around 6% in the next 5 years (compared to 6-6.5% in the previous review). ‘Given China’s track record of reforms and strong commitment by the leadership the IMF are confident that China will rise to the challenges ahead’ in the ‘transition to sustainable, strong, inclusive, and greener growth’. At such growth levels China should continue to be a driving force of global growth but given the stagnation and uncertainty across the major developed and emerging markets we do not see a strong likelihood of global growth undergoing a strong pick-up any time soon.