China should seize the day and push on with tough economic reforms, says IMF

Now is the right time for Beijing to make important economic reforms – including shutting state-owned “zombie enterprises” and cleaning up local government budgets – the International Monetary Fund’s chief China representative has said.

Alfred Schipke argued that the authorities were well-placed to act because the rebalancing of the economy was well on track and the government had adequate protections against external shocks.

In its annual check of China’s economic health, the IMF said the world’s second largest economy would “rebalance to a sustainable growth mode” while its GDP growth was projected to show only a slight decline to 5.5 per cent by 2023 from an estimated 6.6 per cent in 2018.

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“The economy is doing relatively well, and reforms are progressing,” Schipke told the South China Morning Post last week.

“In the baseline scenario, things are looking relatively good … Now it’s time to continue the tough reforms.”

Despite the IMF’s optimism there are growing concerns about China’s growth and financial stability owing to rising bond defaults at home and a looming trade war with the United States abroad.

But Schipke said China’s growth would be bolstered by the digital economy and external demand.

“Both downside and upside risk are equally balanced in the short term,” he said.

He added that Beijing would be able to handle capital outflow pressures, the dollar strengthening and corporate tax cuts in the US.

Schipke said the impact on China would be limited in the near term as the country’s capital account was controlled and the country still has large fiscal buffers – the balance sheet is strong, it has “ample” forex reserves and the public debt to GDP ratio is “not particularly high” even under a broad definition.

“It has room to react if needed,” Schipke added.

One countermeasure advocated by the IMF was a more flexible exchange rate system to absorb external shocks, which would grant Beijing a bigger degree of freedom to focus on domestic rebalancing.

“Things are good now: it’s market determined, flows are more or less balanced, you just have some volatility, but it’s up and down on both sides. So this is when you move forward a little bit on the reform side,” Schipke said.

The IMF has welcomed Beijing’s pursuit of high-quality growth – in which factors such as the impact on the environment are considered – but it called for a greater tolerance of the economy slowing.

Even if the slowdown happens too quickly or if there is a domestic shock, Schipke warned against resorting to previous measures, such as investment stimulus.

He said it was important to continue with the course of reform and try to reduce economic distortions. “This is for China, nothing to do with [other countries],” Schipke said.

He also argued that disposal of state-owned enterprises and “zombie” firms had not been “fast enough”.

“The SOE reform is critical, especially allowing the zombies to exit. Some of the entities are not productive. They not only absorb many resources, but also lead to debt and the misallocation of resources, ” he added.

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In Wednesday’s statement, the IMF warned that China’s trade and investment regime remained relatively restrictive” and it should reduce the dominance of the public sector in many industries, opening up more markets to the private sector and ensuring fair competition.

The Ministry of Finance announced last week that it would cut tariffs on cars and many consumer goods from next month, while the Ministry of Commerce also promised to ease restrictions on foreign investment.

Meanwhile, the People’s Bank of China announced it would further opening up its previously tightly controlled financial industry to foreign investors, allowing them to have a controlling stake in financial joint ventures.

However, Schipke warned the financial opening-up should be done carefully.

He said: “The complementary reforms need to be put in place as well as on the domestic side – a strong and sound financial sector moving forward, with the elimination of implicit guarantee.”