IMF Says China Downside Risks Significant - Bloomberg

By Bloomberg News - 2012-07-25T01:00:00Z

The International Monetary Fund said China’s slowing economy faces significant downside risks and relies too much on investment, urging leaders to boost consumption and channel citizens’ savings away from housing.

Achieving a so-called “soft landing” is a key challenge, directors of the IMF executive board said in a statement released today. “China is well placed to respond forcefully, if needed, to a deterioration of the external environment, in particular through fiscal policy,” the IMF said. It repeated an assessment that the yuan is “moderately” undervalued, which China disputed.

The IMF’s assessment highlights the tension between China’s efforts to stem a six-quarter slowdown in economic growth and limiting threats to longer-term expansion by tilting more toward consumption. Leaders have cut interest rates and stepped up investment as the ruling Communist Party prepares for a once-a- decade leadership handover starting later this year.

“The authorities have taken the foot off the brakes, but they have not yet stepped on the accelerator in a major way,” Markus Rodlauer, head of the China team at the Washington-based lender, said on a conference call with reporters. The IMF statement followed a July 20 directors’ meeting to discuss the annual staff assessment of China’s policies.

Chinese officials agreed that in case of a worsening of Europe’s debt crisis, they would try for a “balanced approach between fiscal and monetary measures,” the IMF staff report said.

Support Options

Options to support the economy while avoiding the side effects of a credit-fueled stimulus include subsidies for consumption, incentives to reduce pollution and greater spending on a social safety net, the IMF staff wrote.

China’s economy is cooling as Europe’s debt crisis limits exports and Premier Wen Jiabao’s past tightening to curb inflation and prolonged efforts to subdue property prices restrain domestic demand. Gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the least in three years. The expansion may cool to 7.4 percent this quarter, Song Guoqing, a central bank adviser, said July 21.

Wen warned this month of a “severe” labor outlook and said economic difficulties may persist for a while as downward pressure on the economy remains “relatively large.”

The IMF repeated its forecast from last week that China’s gross domestic product will expand 8 percent in 2012, compared with 8.2 percent seen in April, and accelerate to 8.5 percent growth in 2013, compared with 8.8 percent predicted three months ago. Inflation will range from 3 percent to 3.5 percent for the year and slow to 2.5 percent to 3 percent in 2013, “barring further shocks to agricultural supply,” the IMF said.

Growth Target

Chinese authorities are “confident” they can reach growth of at least 7.5 percent this year, according to the IMF staff report.

The IMF forecast a current-account surplus of 2.3 percent of GDP this year, rising over the next five years to 4.3 percent in 2017. That longer-term prediction is “well below the 7 to 8 percent of GDP previously expected,” the IMF report said.

China is accelerating capital spending in response to the slowdown, and the IMF said its directors expressed concern about the sustainability of “such a high level of investment in the context of weak external demand and excess capacity.” The IMF sees gross domestic investment little changed this year at 48.5 percent of GDP.

IMF officials “underscored the urgency of reforms to rebalance the economy toward more consumption-led growth,” the lender said. Wen said this month that “growth-stabilizing policies include boosting consumption and diversifying exports, but currently, what is important is to promote a reasonable growth in investment.”

Retailer Warning

Gome Electrical Appliances Holding Ltd., China’s second- biggest electronics retailer, warned yesterday it may post a first-half loss as revenue declined and its e-commerce unit was unprofitable. Gome and Suning Appliance Co., a larger rival, last year benefited from government subsidies on home-appliance purchases.

With the export slowdown, China has allowed the yuan to weaken this year. The currency has dropped about 1.4 percent against the dollar in 2012 after a 4.7 percent gain in 2011.

The yuan “is assessed to be moderately undervalued against a broad basket of currencies,” the IMF staff wrote, reiterating an assessment last month by David Lipton, the IMF’s first deputy managing director. That was a change from the previous stance that the currency was “substantially” undervalued.

Yuan Dispute

China disputed the new assessment and said the yuan was “now close to equilibrium or, at most, slightly undervalued,” according to the report.

The IMF refrained in this year’s report from giving an estimate of how much the yuan may be undervalued, compared with last year’s assessment, which gave a range of 3 percent to 23 percent. Rodlauer said on the call that “numbers tend to get a life of their own,” though some estimates will appear in a separate exchange-rate report to be issued “shortly.”

China in April widened the yuan’s daily trading band for the first time since 2007, allowing the currency to move 1 percent around a rate set daily by the central bank, up from 0.5 percent.

The IMF said China still has a “large agenda” to pursue on improving its financial system including strengthening the framework for crisis management, adopting deposit insurance and regulating risk from loan growth and off-balance-sheet transactions.

IMF officials welcomed China’s efforts to cool the property market while saying that “eliminating the potential for property bubbles requires reforms to channel household savings away from housing and toward other financial assets.”

Wen has vowed to “unswervingly” maintain property controls even as he tolerates some piecemeal measures to support the market.

To contact Bloomberg News on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Zheng Lifei in Beijing at lzheng32@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net

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IMF Says China Downside Risks Significant as Growth Pace Slows

Shoppers walk through a dry goods market in Changsha, Hunan Province, China.

Shoppers walk through a dry goods market in Changsha, Hunan Province, China. Photographer: Nelson Ching/Bloomberg