IMF predicts soft landing ... with advice for Beijing
China's economy is sailing safely towards a soft landing, but it needs to move away from its export and investment-driven growth focus if it wishes to maintain vitality, according to the International Monetary Fund.
'China is landing quite well. Its inflation is down, investment and growth has slowed,' said Zhu Min, IMF deputy managing director, yesterday during his first speech in Hong Kong since assuming his new position in July of last year. 'However, it still needs to carefully manage its investment-driven development model, as investment takes up about 48 per cent of gross domestic product.'
Zhu's words echoed a string of heavyweight calls for reform, including ones from Premier Wen Jiabao and Vice-Premier Li Keqiang and scholars at China's central bank and the national state council.
Li said over the weekend that 'reforms have entered a tough stage', and that 'China has reached a crucial period in changing its economic model and [change] cannot be delayed'.
The fear is that the current situation, in which exports and investment contribute to most of China's GDP growth, is no longer sustainable. Export growth to Europe, the largest trading partner with China, had dropped almost to zero, and an investment driven economy had left the country with a huge pile of debt that could potentially go sour, economists said.
China faces other pressing issues including the fact that it needs to open up its services sector, move its manufacturing business up the value chain and relax its exchange rate regime.
Central bank governor Zhou Xiaochuan's comments last week that the yuan was getting closer to fair value against foreign currencies spurred concerns that the currency's steady rise was nearing an end.
Zhou's words countered the United States' repeated criticism that the yuan is undervalued.
Zhu said the key issue was for China to move to a more flexible currency exchange regime.
IMF managing director Christine Lagarde also said over the weekend that the yuan could become a global reserve currency with the right mix of market-oriented structural change.
'What is needed is a road map with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account,' Lagarde said.
On Europe, Zhu warned that even though the global economy had stabilised, the risks were 'still on the downside'.
European banks, which used to contribute 50 per cent of global trade financing, have been deleveraging and this would be a long-term process that severely pinched liquidity in trade financing activities.
'We've seen in the past few months that a few local banks have been trying to take up the business that European banks used to occupy in the trade finance business, but this is still not enough,' Zhu said.
European banks held a lot of international exposure, Zhu said, adding that European lenders had also cut their syndication loans to the shipping and aviation industries.
The trade deficit, in US dollars, for China - the world's largest exporter - last month. It was the first deficit in a year and the largest in a decade