China’s economy set for soft landing, says IMF

25 Jul 12
China’s economic growth is slowing to a more sustainable pace but it faces increasing risks from the eurozone crisis, the International Monetary Fund said yesterday.

By Nick Mann | 25 July 2012

China’s economic growth is slowing to a more sustainable pace but it faces increasing risks from the eurozone crisis, the International Monetary Fund said yesterday.

In its on the Chinese economy, the IMF warned that ‘increasing global headwinds’ could affect the country’s efforts to achieve a managed slowdown in growth. They could also have an impact on longer-term reforms aimed at creating a more balanced, sustainable and inclusive growth model.

Gross domestic product growth is expected to slow to 8% this year, compared with 9% in 2011, before increasing slightly to 8.5% next year. Inflation has also fallen from a peak of 6.5% in July 2011 to 2.25% this June. It is now expected to stay in the 3%–3.5% range this year before falling to between 2.5%–3% next year.

China’s overall deficit is expected to be 1.25% of GDP, unchanged from last year in cyclically adjusted terms. The IMF said the government’s 2012 budget struck an ‘appropriate’ balance between unwinding the 2009/10 fiscal stimulus and supporting the growing economy while remaining within the overall fiscal target. Actions include speeding up work on approved projects and introducing measures to support energy-efficient consumption.

The IMF’s executive board said China was ‘well placed’ to respond forcefully through fiscal policy if the global economic situation deteriorated further. The government should, however, carry out fiscal reforms that encourage private consumption, such as tax reforms and developing a stronger social safety net.

‘Framing these policies in clear medium-term fiscal plans would anchor expectations and ensure that the reform agenda is fiscally sustainable,’ they said. ‘Strengthening the finances of local governments should also be a priority in fiscal reform.’

China was also urged to speed up the economic and social policy reforms set out in its twelfth Five Year Plan, adopted in 2011.

In particular, the IMF called for further financial sector liberalisation, an expansion of the services sector and exchange rate flexibility as well as increased prices during production processes.

‘Together, this reform package will raise living standards, achieve the desired rebalancing of growth, and distribute its benefits more widely,’ it said.

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