IMF raises forecast for China’s annual growth

World Today

In this Tuesday, Aug. 15, 2017 photo, Chinese workers take a break outside a construction site at the Central Business District in Beijing. (AP Photo/Andy Wong)

China’s short-term growth outlook has strengthened but there is growing risk of a sharp medium-term adjustment due to reliance on stimulus to meet targets and a credit-expansion path that may be “dangerous”, the International Monetary Fund said on Tuesday.

The IMF raised its forecast for China’s average annual growth from 2018-2020 to 6.4 percent from 6.0 percent and said there is now a greater chance that authorities will meet their target of doubling 2010 real GDP by 2020.

But it warned of the consequences to long-term economic health.

The main cost of stronger growth “is further large increases in public and private debt”, the IMF said in its annual review of China’s economy.

“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown”, the report said.

The IMF estimates that China’s economy would have grown about 5.5 percent annually from 2012-2016 if credit was expanded at a “sustainable” pace, compared to the average 7.25 percent that it recorded.

“The key policy imperative is to replace precise numerical growth targets with a commitment to reforms that achieve the fastest sustainable growth path.”

The report said that China should boost consumption.

“At 46 percent of GDP, China’s national savings are 26 percentage points higher than the global average, largely due to the household sector, with consumption correspondingly low. This reduces the current welfare of Chinese citizens, fosters high levels of investment which are unlikely to be absorbed efficiently, and, were investment to fall, would lead to even larger current account surpluses, worsening global imbalances,” the IMF said.

The IMF also said that increased government spending on health and pensions can help increase government and private consumption by reducing people’s need to save.

“Increasing the progressivity of the tax system could finance higher social spending and reduce income inequality, which is among the highest in the world,” the IMF said.

The IMF also said China can increase productivity.

“This can be done by making better use of resources that are currently going to loss-making (“zombie”) companies, overcapacity industries, and State-Owned Enterprises (SOEs). The IMF estimates that such efforts could increase the contribution of productivity to growth by about 1 percentage point over the long term,” the IMF said.

Story by Reuters with information from the IMF.