Growth outlook up but don’t be too optimistic about China, IMF says

Heat could come off property and overseas demand for Chinese products, IMF executive warns

PUBLISHED : Thursday, 24 August, 2017, 7:11pm
UPDATED : Thursday, 24 August, 2017, 7:11pm

China’s growth prospects may be higher but it’s a bit too optimistic to suggest the world’s second-biggest economy is entering a new cycle of expansion, the International Monetary Fund’s chief in China said on Thursday.

The caution over the country’s economic prospects came a week after the Washington-based fund revised up China’s average annual growth forecast from 6.0 per cent to 6.4 per cent for 2018-2020.

“We would be a little bit more cautious on the [new cycle] statement because some of the tightening coming from the financial sector should have a decelerating impact on economy,” Alfred Schipke, IMF senior resident representative in China, said in Beijing on Thursday.

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“When the real estate sector does not perform as strongly as it did in the past, that would probably have impact on the growth outlook.”

China’s stronger-than-expected economic growth in the first half and the steady appreciation of the yuan against the US dollar has dispelled bearish views among various banks and institutions, including the IMF, prompting them to revise up their forecasts for China.

At the same time, the market is divided over the economy’s real strength and just how much industrial profitability can improve.

One of the biggest debates among Chinese economists is whether China has bid farewell to overcapacity and entered a new phase of growth.

Schipke said China’s economic resilience was underpinned by a booming property sector and greater demand for Chinese products abroad, but both could lose steam down the road.

“I am careful to say that we are at the beginning of an upside [in growth],” he said.

Earlier this month, the IMF warned that growth might lead to more debt, forecasting non-financial sector debt to amount to over 290 per cent of GDP by 2020, up from 235 per cent last year.

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It said China needed to address deeper challenges, such as excessive savings, a bloated state sector, persistent overcapacity, elevated corporate debt, financial sector fragility and the hesitation to liberalise the exchange rate and capital account.

The economy is already showing signs of softness, with all major economic gauges falling below expectations in July.

There are also concerns that the government’s reliance on administrative orders to push supply-side reform such as capacity cuts will backfire on the overall economy, such as squeezing out the private sector and exacerbating price volatility.

Heed the warnings on China’s economy

Citing its second-quarter survey of more than 2,000 industrial firms, the Cheung Kong Graduate School of Business said the industrial economy had not yet bottomed out because investment remained sluggish, and production and power consumption was flat.

“The biggest challenge facing the industrial economy is still overcapacity. Both its prevalence and severity remain at close to historically high level,” the report said.

“The structural problems of China’s industrial economy remained still a significant concerns.”