China Economy

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 : Monday, 30 May, 2016, 5:01pm

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.