IMF trims forecast for China’s GDP growth, raises outlook for US
Mainland GDP targets lowered to 6.8 per cent and 6.3 per cent for next two years, with falling property prices and ageing population to blame
The International Monetary Fund has cut its forecasts for China's economic growth for this year and next as the global economic rebound plateaus, despite a sharp drop in oil prices.
The fund expects China's gross domestic product growth to slow to 6.8 per cent and 6.3 per cent - estimates revealed in the update to its World Economic Outlook published three months ago.
Back then, it expected economic growth of 7.1 per cent and 6.8 per cent for the two years, respectively.
But Gian Maria Milesi-Ferretti, a deputy director of research at the IMF, said slower growth and lower prices provided a positive backdrop for much-needed structural reform to rebalance the world's second-biggest economy.
"The decline in oil prices is a positive for China. China needs to rely less on stimulus, which is good for rebalancing. It is going to provide a boost to the Chinese economy in the next few years," Milesi-Ferretti said.
Beijing has repeatedly stated its intention to shift the economic mix of the country towards domestic consumption and services from the investment-heavy and export-oriented manufacturing formula that has driven massive growth for the past 30 years.
That formula lifted hundreds of millions of people out of poverty but it also polluted the environment, inflated a dangerous real estate bubble and created an enormous debt mountain of off-balance sheet lending in so-called shadow banking activity that distorts financing costs.
"We have concluded from discussions with the Chinese authorities that they will do less public investment and take more measures to clean up shadow banking," said Olivier Blanchard, the IMF's research director.
Investment growth in China declined in the third quarter of last year, and leading indicators pointed to a further slowdown, an IMF report said.
One sector where excess capacity was acute was real estate, where there were many unsold properties in third and fourth-tier cities, Milesi-Ferretti said. "The bigger macroeconomic risk comes from real estate."
Oil prices, which have fallen to more than five-year lows, would enable the Chinese government to maintain economic growth at a decent level without having to resort to infrastructure investments, Milesi-Ferretti said.
The fall in oil prices "is clearly good news" for oil importers such as China and the United States but bad news for oil exporters like Russia, Blanchard said.
Given that China's oil imports accounted for 2.5 per cent of its GDP, the drop in oil prices translated to a 1.25 per cent boost to the nation's GDP, which was fairly substantial, he said.
China's slowdown in the short term was due to declining real estate prices, but the ageing population and increasing wealth of its people would be factors that would slow the nation's GDP growth in the medium term, Milesi-Ferretti said.
The slowdown in global growth mainly came from developing nations, which were hurt by the slowing Chinese economy, Milesi-Ferretti said. "With slower growth in China will come slower import growth for China."
The IMF projects global GDP growth to be 3.5 per cent this year and 3.7 per cent next year, down from its projections in October last year of 3.8 per cent and 4 per cent, respectively.
The World Bank recently downgraded its forecast for global GDP growth this year to 3 per cent from 3.4 per cent.
In contrast, IMF revised up its forecast for US GDP growth to 3.6 per cent this year and 3.3 per cent next year, from 3.1 per cent and 3 per cent respectively. It was the only major economy upgraded in the update to the World Economic Outlook.
