China has the potential to safely sustain strong 6+% GDP growth over the medium term
The First Deputy Managing Director of the International Monetary Fund David Lipton said the IMF was confident that China will once again find its way through the challenges ahead. China has the potential to safely sustain strong growth over the medium term.
While some near-term risks have receded, reform progress needs to accelerate.
specific recommendations build on the progress achieved and the government's existing reform agenda. In particular:
China needs to further boost consumption . Continued increases in public spending on health, pensions, education, and transfers to poor households would reduce excessive precautionary savings and, combined with making the tax system more progressive and greener, would boost growth while reducing China's high income inequality and pollution.
To increase the role of market forces, the existing reform agenda for state-owned enterprises (SOE) should be accelerated and broadened to include phasing out implicit support and increasing tolerance for default and exit. Building on recent announcements, barriers to entry should be removed, especially in the highly closed service sector. Efforts to reduce overcapacity should have more ambitious targets both in the coal and steel sectors and in other sectors, with greater reliance on market forces.
A more sustainable macro-policy mix would include focusing more on the quality and sustainability of growth and less on quantitative targets, a gradual fiscal consolidation, and less accommodative monetary policy. To reduce nonfinancial sector debt, the focus should be on greater recognition of losses, especially of underperforming SOEs and zombie enterprises. Reducing the flow of new debt and increasing its efficiency requires cutting off-budget public investment and imposing hard budget constraints on SOEs.
The critically important recent focus on tackling financial sector risks should continue, even if it entails some financial tensions and slower growth. We will have more detailed analysis and recommendations on the financial sector in our five-yearly Financial Sector Assessment Program (FSAP) review, which we expect to be completed by the end of the year.
The old IMF GDP forecast projected
If the new forecast were realized then China might be about $15.3 trillion in 2020 or about three times the size of Japan GDP.
