• Fri
  • Dec 26, 2014
  • Updated: 11:54am

IMF lowers China's 2015 growth to 7pc

Agency cuts forecast from 7.3pc, but advises against further stimulus

PUBLISHED : Friday, 06 June, 2014, 12:38am
UPDATED : Friday, 06 June, 2014, 12:38am

The International Monetary Fund cut its economic growth forecast for China to about 7 per cent for next year, but urged the authorities to avoid further stimulus measures and concentrate on curtailing financial risks instead.

In remarks that projected confidence about the health of the world's second-biggest economy, the IMF said Beijing must keep its word on implementing reforms that would correct imbalances, including a "moderately undervalued" yuan.

Specifically, it said conditions were right for China to take the next step in freeing its interest rates market, challenging the view among some senior Chinese officials that the country is not yet ready for such a move.

"We are not counselling stimulus at this point," the IMF's first deputy managing director David Lipton told reporters, when asked if he thought the government should do more to shore up flagging economic growth. "We don't think there are sufficient signs that would warrant that."

Rather, he said the bigger threat to China was its persistent reliance on debt and investment in areas such as real estate to power its economy, weaknesses that are still growing today.

So unless the economy was at risk of missing the government's growth target of about 7.5 per cent this year by a substantial margin, Lipton said more stimulus was unwarranted.

"Vulnerabilities have risen to the point that containing them should be a priority," he said, noting that the IMF believed China could hit its economic growth target for this year.

For next year, the IMF lowered its economic growth projection from 7.3 per cent to about 7 per cent - a level that Lipton said was realistic if China were to carry out extensive financial reforms, as it promised to.

Two policy steps in the past week significantly broadened the support to the economy without breaching vows to avoid major stimulus, through a quickening of government spending and a second targeted cut in reserve requirements for some banks. The moves look intended to keep growth near 7.2 per cent, which Premier Li Keqiang has said is needed to support jobs growth.

"There is no need for such a move as long as we could maintain quarterly GDP growth rates of 7.2-7.3 per cent, which could be a tipping point for policy change," said Wang Jun, a senior economist at the China Centre for International Economic Exchanges, a well-connected think tank.

Beijing has announced a series of modest stimulus measures in recent months after the economy got off to a weak start this year.

Business surveys in the past week signal activity may be starting to stabilise but a slight pickup in parts of the economy does not mean a solid, broader recovery is under way.


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The money borrowed abroad will gradually revaluate the yuan in the future as they are exchanged from the foreign dollar back to yuan to be used locally in the country.
It is hoped that China will not forget to develop her own bond market when she is doing all those external borrowings.
Instead of allocating more efficiently the scarce domestic capital available in China to the most-valued uses, the SAFE (State Administration of Foreign Exchange) is now loosening the rules under which Chinese companies can borrow abroad --- effective from June 1.
As time goes on, more of China's remaining debts will become external debts.
This will increase the external risk faced by the country, especially if the yuan has to devalue in the future.
Perhaps the relatively low interest rates available abroad is too hard to resist.
I think, the PBOC could also lend out part of the country's US dollar reserves to the Chinese banks, exchanging them for yuan in the foreign exchange market, and relent to the Chinese borrowers, to achieve the same aim as the present SAFE arrangement.
In a sense the east is economically subsidizing the middle and western parts of the country at present.
Remember that in economics, the Law of Diminishing Marginal Returns forever reigns supreme.
The tradeoff between efficiency and equality is always there --- more of one usually means less of the other.
According to a well-known Chinese mantra, you can't have both fish and bear's paw at the same time: in order to get something, you have to sacrifice something else.
In English, you can’t have your cake and eat it too, or, you cannot sell the cow and drink the milk.
(Chinese readers: ****opinion.caixin.com/2014-06-04/100685835_1.html)
(Chinese readers: ****opinion.caixin.com/2014-06-06/100686923.html)
Economics remains forever a dismal science.
Like the other countries in the world, China may arguably need more, not less, concentrated mega cities right now.
China’s coming GDP growth rates can easily be sustained at a relatively high level, and so facilitating the country’s necessary deleveraging process and buying time for further reforms in the future, by doing the right kinds of investment in the right places.
One main problem prevailing at present is that the development of the country’s cities, or her urbanization method, is too diverse, not concentrated enough, unlike those experienced by the other countries.
The rationale guiding the Chinese planners may be that the principle of egalitarianism has to be taken into consideration --- the central and especially the western cities should also be as developed as their eastern-coast counterparts.
But problem is, the property and infrastructure developments in the middle and especially the western cities are mostly not self-liquidating, because the population density and the average income level of the residents there are simply not high enough --- these investments mostly lead to higher accumulating debts on the part of the local governments and the banks.
Say for example, 'eight-lane highways that have never seen a car or truck peter out in the middle of the Gobi desert.'
Even releasing the restriction of the Hukou system and allowing the rural farmers in the nearby provinces to move into those cities are not enough to solve this problem.


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