• Thu
  • Sep 18, 2014
  • Updated: 2:24am

Beijing's economic growth targets are too high, IMF says

Bank says goal of 7.5 per cent for this year will be met, but long-term expansion may be at risk

PUBLISHED : Thursday, 31 July, 2014, 11:26am
UPDATED : Friday, 01 August, 2014, 4:30am

The International Monetary Fund has urged Beijing to lower its growth target next year but forecasts China is likely to meet its annual target of "around 7.5 per cent" this year.

The IMF, as well as Fitch Ratings, yesterday warned China about the risks of relying on credit and investment expansion to defend a targeted growth rate at the cost of creating prolonged structural weakness in the economy.

A target growth rate of 6.5 to 7 per cent for 2015 "would be consistent with the goal of transitioning to a safer and more sustainable growth path", the bank said in a statement after its executive board concluded its annual consultation with China.

It said that was the view of most of its directors, but a few others believed a lower target might be "more appropriate".

The bank also suggested China should not pursue "broad-based stimulus" unless "growth risks slow significantly below the authorities' target".

China remains heavily reliant on capital spending and credit, which has sustained rapid growth. But "declining efficiency of investment, a significant buildup of debt, income inequality and environmental costs are threatening growth prospects", the IMF said.

Andrew Colquhoun, head of Fitch Ratings' Asia-Pacific Sovereign Ratings, echoed the view at a teleconference yesterday.

Despite the rebound in the second quarter, China had paid the price in the form of reacceleration in money and credit growth, marking a step backwards in rebalancing the economy, he said.

"So the short-term fix for the economy is exacerbating its longer-term structural weaknesses."

The key question related to China's sovereign credit rating over the next six months was whether the policy easing in the second quarter was "a tactical retreat" followed by broader rebalancing reforms, he added.

China's gross domestic product grew 7.5 per cent in the second quarter, up from 7.4 per cent - an 18-month low - in the first.

The IMF urged China to launch key reforms, including freeing up bank-deposit interest rates, creating a level playing field for the private and public sectors and revamping the fiscal and social security systems.

Growth is forecast to gradually ease to 6.3 per cent by 2019, the bank said. But the rate could drop to as low as 5.9 per cent if "little to no reforms" were launched and accommodative policies continued, it warned.

Last month, the IMF predicted that the Chinese economy could grow 7.4 per cent this year. Ma Dezhi, a communications officer at the bank, said the projection was in line with the latest forecast at "around 7.5 per cent".

More important than the numerical predictions, Ma said, was for Beijing to put into place "the right mix of policies" to sustain growth in the long term.

The IMF said the yuan was "moderately undervalued" and that Beijing should refrain from "sustained, large and asymmetric intervention".

In the real-estate sector, the bank said China was facing the challenge of allowing a necessary correction while preventing an excessively sharp slowdown.



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30 Jul 2014 - 5:21am

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It's said that Beijing has fallen into the trap set by the foreigners.
Whenever the foreign newspapers 'cooperate with each other' to orchestrate the coming economic crisis in China in unison, the Chinese authority will immediately react by enacting releveraging policies to stimulate the economy.
Doing so means further delaying the necessary structural and real reforms that are sorely needed in the country, even though it's commonly argued that this was done to buy time for further economic reforms in the future.
(Chinese readers: ****money18.on.cc/econ/econ_comment_content.html?type=2&cat=econ&aid=20140801022628_0000&subsect=comment&adate=20140801)
With a larger and larger base number over the years, it's natural for the country's GDP growth rate to be getting smaller and smaller as time goes on.
What's really needed is that the central and local governments should increase their social security expenditures to lessen the harmful effects of higher unemployment on the real economy.
Indeed this should have been done a long time ago.
Right now, the country's social security expenditure as a share of total expenditure is still relatively low.
A country's citizens is like water, and their government is like a boat.
The water can both 'float' and 'sink' the boat.
In Hong Kong, the iBond benefits given to the Hong Kong people are too trivial to be mentioned.
More can be done by the government to appease her people (the middle class in particular).
According to the Chinese government's budgets, the government's revenue as a share of GDP was 31% in 2011, 36% in 2012, 39% in 2013, and is already more than 44% in the first half of this year !
In the Nordic welfare countries, the level is from 45% to 52%. But in these countries, it's the responsibility of their governments to provide the education and medical services to their citizens.
The level is from 35% to 40% for the less-welfare-oriented countries of the US, Britain and Japan.
(Chinese readers: ****economy.caixin.com/2014-07-31/100711345.html)
China may now be paying the price of having set a wrong objective years ago --- doubling the country's GDP once again by 2020.
By the rule of 72, this means an average annual GDP growth rate of about 7.2 percent in the coming years.
To achieve this objective, it's least costly to prop up the country's investment level, even if this means investing just for the sake of investment, thereby turning some of the country's valuable domestic savings into 'bad' savings so as to finance the 'bad' investments.
Eight-lane expressway built in a remote area of the western part of the country is not unheard of.
No one can beat the Law of Diminishing Marginal Returns.
The country's total debt/GDP ratio has to keep on rising --- 20/20 hindsight is not needed to figure this out.
A better alternative is to enact a National Income Doubling Plan, like that of Japan many years ago.
This objective can much better balance the domestic economy than the initial one.
The local governments would have incurred much less bad debts as a result.
The central government would probably have introduced an across-the-board tax reduction plan also.
Rural-land reform would have been enacted much earlier than is the case right now, in order to increase the income and wealth of the farmer workers ...
In a chess tournament, just one wrong move usually means losing the whole game.
It's still not too late to change the objective now.
I think it's an American who once said the following many many years ago:
'If the share of a company rises, buy it;
if it doesn't rise, don't buy it.'
Up till now, I still can't apply this principle successfully to help my stock investments.
But a similar claim can be made regarding China's coming economic growth.
'If the growth model works, use it;
if it doesn't work, don't use it.'
What's crucial is whether the growth model is sustainable.
If something can't go on forever, it won't.
Change is the only constant under the sun.


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