China worried by US monetary policy, decoupling, but Beijing shares optimistic economic growth outlook with IMF

Chinese officials, the private sector and academia spoke with the International Monetary Fund (IMF) last year as part of the annual Article IV consultation
Earlier this week, the IMF downgraded China’s 2022 growth estimate to 4.8 per cent from the 5.6 per cent expansion predicted in October

China's economic recovery

Frank Tangin Beijing

Published: 4:00pm, 28 Jan 2022

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A health check of China’s economic and financial systems by a leading international organisation has revealed Beijing has admitted being concerned about external risks such as US monetary policy tightening and decoupling, but remains optimistic about China’s economic growth prospects this year.

While acknowledging the impact of its zero-Covid strategy on its biggest growth drivers, officials are more concerned about how the global recovery has been damaged by renewed coronavirus outbreaks, shortages of key components and shipping bottlenecks, according to a report released by the International Monetary Fund (IMF) on Friday.

China’s economic recovery has slowed, the Washington-based organisation said, and remains unbalanced and subject to risks, while it called for continued supportive policies and progress in key structural reforms.

“China’s recovery is well advanced, but it lacks balance and momentum has slowed,” the report said, pointing to the rapid withdrawal of policy support, the lagging recovery of consumption and slowing real estate investment as major factors.

The comments were made during the annual Article IV consultation between the IMF, Chinese officials, the private sector and academia from October 28 to November 10.

In its separate quarterly “World Economic Outlook” released earlier this week, the IMF downgraded China’s 2022 growth estimate to 4.8 per cent from the 5.6 per cent expansion predicted in October.

It called for greater fiscal support that focuses on strengthening social protection which will allow households to reduce their precautionary savings and facilitate the transition to consumption-driven growth.

Monetary policy should also be accommodative and interest rate-based, it said, pointing at the country’s low inflation after China’s consumer price index grew by only 1.5 per cent year on year in December.

Technological decoupling could accelerate to damaging levels, with losses ranging from around 2 to 5 per cent of gross domestic product in the longer term depending on the scenario

IMF

The IMF particularly warned of medium-term risks, including slowing market dynamism and a shrinking workforce, as well as a variety of “predominantly negative” factors.

“Technological decoupling could accelerate to damaging levels, with losses ranging from around 2 to 5 per cent of gross domestic product in the longer term depending on the scenario,” the IMF said.

Growth could slow from more rapid financial decoupling owing to increased external tensions, a faster decline in domestic productivity growth and investors retreating more permanently, it warned.

During the consultations with the IMF last year, Chinese officials expressed confidence about achieving robust growth in 2022, despite its quarterly expansion slowing to 4 per cent in the fourth quarter of last year from 18.3 per cent in the first three months of the year.

China is widely believed to be aiming for an economic growth target of above 5 per cent this year, from “above 6 per cent” last year, citing the economic stability frequently cited by its top leadership.

Beijing acknowledged that its zero-Covid strategy is impacting the recovery of private consumption, but believes the benefits outweigh any economic cost.

They expect private consumption to strengthen as contact-intensive activities recover with less frequent and more targeted lockdowns in the future.

Consumption contributed 65.4 per cent of last year’s growth, compared to 13.7 per cent from investment and 20.9 per cent from net exports, according to the National Bureau of Statistics.

Retail sales, a key indicator of consumption, rose by just 12.5 per cent in 2021 from a low base a year earlier, including a particularly worrying growth rate of 1.7 per cent in December.

The IMF also welcomed China’s de-risking measures, but said that regulatory measures including those targeting the technology sector, must be implemented in a transparent and predictable manner to reduce uncertainty.

“Policymakers should guard against systemic contagion in property markets by improving risk monitoring and policy coordination and adopt structural measures to reduce longer-term risks,” the IMF said.

Beijing has refined its property policies in the wake of the debt crisis involving Evergrande, with increased lending to developers and mortgages for homebuyers.

The government appears determined to introduce policies that are conducive to growth and hold back those that undermine stability

The mortgage reference rate was also cut for the first time in almost two years earlier this month following the lowering of two other major policy rates since the start of the year.

Authorities are also front-loading the construction of mega infrastructure projects and allocating local bond quotas earlier than normal to promote “effective investment” and to stabilise the growth.

“The government appears determined to introduce policies that are conducive to growth and hold back those that undermine stability,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank, on Thursday while predicting an economic growth rate of 5.3 per cent for 2022.

“We expect the national target to be set at 5.5 per cent, with policies aligned to beat the target.”