China’s leaders should strive to ensure that economic growth is more demand driven, according to officials from the International Monetary Fund, as they also emphasised the need for Beijing to underscore market-oriented reforms at a highly anticipated political gathering in July that will set the tone for the country’s development trajectory in the next decade.
At a press conference in Beijing on Wednesday, the IMF revised its projection for China’s growth this year to 5 per cent – a 0.4 percentage point increase from the projection in April, bringing the financial agency’s estimate in line with the full-year target set by Chinese authorities in March.
In justifying its revision, the IMF pointed to strong economic data in the first quarter and property stimulus measures that Beijing recently announced.
“Risks are tilted to the downside, including from a greater- or longer-than-expected property sector adjustment and increasing fragmentation pressures,” Gita Gopinath, the IMF’s first deputy managing director, said after meeting in the past week with finance officials in the Chinese government – including People’s Bank of China governor Pan Gongsheng.
China’s GDP grew 5.3 per cent in the first quarter of 2024, outpacing most economists’ expectations. Two weeks ago, Beijing announced a slew of measures to rescue its staggering property sector, including 300 billion yuan (US$41.4 billion) worth of funding to help clear excess housing inventory.
This takes us to things like giving the market a decisive role in the economy … and levelling the playing field
To achieve high-quality growth in the medium and long term, Beijing should conduct structural reforms to counter headwinds and address underlying imbalances, Gopinath said.
“Key priorities include rebalancing the economy towards consumption by strengthening the social safety net and liberalising the services sector to enable it to boost growth potential and create jobs,” she said.
Steve Barnett, the IMF’s senior resident representative in China, said Beijing should continue with economic reforms to boost productivity as it rolls out plans for the next decade at the Central Committee of China’s Communist Party’s third plenum in July.
“If we think of the third plenum as a time to look at medium- and long-term reforms, if I could pick just one [pressing issue to focus on], it’s to boost productivity,” Barnett said at the press conference. “The way to do that is to continue with economic reforms.
“And this takes us to things like giving the market a decisive role in the economy – which actually featured prominently for the first time in the 2013 third party plenum – and levelling the playing field between all types of firms – state-owned firms, private firms, foreign firms.”
He added that China’s GDP level could be 18 per cent higher over a 15-year period with “good reforms”.
Also on Wednesday, the Washington-based organisation raised its projection for China’s economic growth in 2025 to 4.5 per cent, up from 4.1 per cent in an April forecast.
Inflation is expected to rise but stay relatively low as output remains below potential, with core inflation increasing only gradually to average 1 per cent in 2024, the IMF said.
Over the medium term, China’s annual economic growth is expected to decelerate to 3.3 per cent by 2029, it added, citing factors related to an ageing population and slower productivity growth.
Currently, China should prioritise mobilising central government resources to protect buyers of pre-sold unfinished homes and accelerate the completion of unfinished pre-sold housing, paving the way for resolving insolvent developers, Gopinath said.
“Excluding the one-time property sector package, a neutral fiscal stance in 2024 would balance the trade-offs between supporting domestic demand, mitigating deflation risks, and managing unfavourable debt dynamics,” she said.
There is room for further easing in terms of monetary policy, given the subdued inflation and output below potential in the country, and greater exchange-rate flexibility would reduce deflation risks and help absorb external shocks, Gopinath added.
To tackle elevated financial stability risks, Chinese authorities have appropriately focused on addressing vulnerabilities in the property sector, local government debt, and smaller financial institutions, she said.
“Strengthening the bank resolution framework and strictly applying prudential standards will help enhance financial stability and mitigate risks.”
She added that China’s use of industrial policies to support priority sectors can lead to a misallocation of domestic resources and potentially affect trading partners, echoing recent concerns voiced by Western politicians on China’s industrial overcapacity.
“Scaling back such policies and removing trade and investment restrictions would raise domestic productivity and ease fragmentation pressures. In this context, China should continue its efforts to strengthen the multilateral trading system, particularly the [World Trade Organization].”
