core sector communique

Opening Remarks by Mr. John Lipsky – Acting Managing Director, International Monetary Fund, Press Conference at the Conclusion of the Article IV Mission to China

 

Ritz Carlton Hotel - Beijing 
June 9, 2011

As prepared for delivery

Good morning everyone. It is truly a pleasure to be with you today. First and foremost, I would like to express my appreciation to our Chinese hosts who, as always, have been generous with their time and candid in our discussions.

This year’s Article IV consultation with China was, in many ways, a unique event.

Of course, we have carried out the normal Article IV process that comprises our basic annual discussion with our members regarding their economic, financial and policy outlook. This will be reflected in a report that will be discussed at our 24-chair Executive Board. However, there are two additional -- and notable -- aspects to this year's process.

In particular, China has participated in for the first time in an assessment of its financial system as part of the joint IMF-World Bank Financial Sector Assessment Program (FSAP). I believe this exercise -- that comprises an in-depth analysis of China's financial system -- was of great mutual benefit to the IMF and to China. The FSAP results and conclusions will be discussed by the Fund’s Executive Board alongside the Article IV report, is by no means the end of the process, but rather the start of a deepening engagement with China on financial sector reform issues.

At the same time, my Fund colleagues have been examining in detail how the dynamic changes that currently are underway in the Chinese economy are affecting other countries in the global economy. This “spillover” report— that the IMF is carrying out for the first time on five large and systemic economies: Japan, China, the United States, the euro area, and the United Kingdom—is an innovation intended to strengthen our analysis of multilateral economic and policy interactions in the wake of the global financial crisis, and to promote a more effective dialogue with our members on these vital issues.

In sum, our standard annual consultations this year are being combined with the inputs and insights deriving from the FSAP and the Spillover work in a panoramic view of economic developments in China, placed firmly in a global context.

Here are some of the key findings of our discussions.

First and foremost, China continues to be a bright spot for global growth that we anticipate will continue. Thus, we have maintained our growth forecast for both this year and next at around 9½ percent. Inflation clearly has become a much more pressing social concern over the past year. However, we expect that many of the key drivers of inflation will soon start to dissipate. As a result, we expect that inflation will slow to around 4 percent by year-end and hopefully continue to slow in subsequent years. There are uncertainties, of course, and we potentially could still see upward pressures emanating from either higher global commodity prices or further weather-related shocks to food prices in central and southern provinces in China.

China’s policy response to the global crisis was proactive, substantial, and effective. By sustaining Chinese growth and boosting domestic demand, the global economy benefitted greatly. With the economy currently on a solid footing, it is natural and appropriate for both monetary and fiscal stimulus that was put in place to counter the crisis to be phased out. This year’s budget clearly is beginning this process, and we expect the fiscal position to head back toward balance in the coming years. For monetary policy, this year's M2 growth target is the right one. A more balanced use of monetary tools, including more reliance on interest rates and less use of direct administrative limits on loan growth would help achieve the intended policy objectives of supporting growth more effectively while improving the economy's balance.

The measures that the authorities have taken to progressively slow down the rise in real estate prices are having the desired impact. Nonetheless, China still has a propensity for rapid rises in property prices, driven by high savings, cheap financing, low carrying costs, and the lack of alternative investment instruments. Any durable solution for creating better balance in the property sector, the asset sector in general, will need to involve financial sector development, a higher and more appropriate cost of capital, and improved real estate taxation.

One of the key goals of the Group of 20's innovative Framework for Strong, Sustainable and Balanced Growth -- to be attained through the Mutual Assessment Process (or MAP) -- is to reduce the imbalances -- both external and domestic -- that undermine global growth. In this context, it is important to note that China's current account surplus has fallen significantly in the wake of the financial crisis. Nonetheless, it is the judgment of my IMF colleagues that measures will need to be deployed in the coming years to prevent a renewed expansion of China’s current surplus, by boosting the economy's relative reliance on domestic demand growth. Many of the policies that would support this goal are cited in the government’s Twelfth Five-Year Plan, including measures to further strengthen the social safety net, especially pensions and healthcare; rationalize the cost of capital, energy, and other factors of production; and find ways to increase household income. A stronger renminbi will be one ingredient of this comprehensive package of reforms that would support the objectives set out in the 12^th Five-Year Plan.

One important tool for improving the economy's performance that was emphasized in this year's consultation was the reform and liberalization of the financial system. This is the reason why the FSAP this time around is so important. A strengthened financial system would help to transform China’s growth model toward a more inclusive economy that is focused on improving people’s standard of living. A roadmap for reform should include a strengthening of the monetary policy framework, improvements in the regulatory, supervision and financial stability framework, deepening and developing financial markets, deregulating loan and deposit interest rates, and eventually moving toward the longer-term goal of an open capital account with the renminbi as a fully convertible currency. We have discussed in depth with our Chinese counterparts regarding these issues, and there was broad agreement that financial sector development should be well sequenced and handled carefully.

The FSAP exercise has concluded that important progress has been made in moving to a more market-based financial system. Nevertheless, China still confronts the risk of a build-up of financial sector vulnerabilities. The complexity of the system is growing and there are limitations in terms of data collection, monitoring of systemic issues, and information exchange. There also are well known near-term risks arising primarily from the recent credit expansion, increase in off-balance sheet exposures, the rapid increase in real estate prices, and potential external spillovers. The FSAP findings point to the need to expand the regulatory and supervisory perimeter, improve coordination among regulatory agencies, and revamp the financial stability and crisis management framework. This is a huge task, but will pay off for China’s long term economic growth and performance.

Finally, the analysis presented in the spillover report puts in context why the above agenda, to transform China’s economic growth model is so important to the rest of the world. China is a central player in world trade, and is rapidly evolving beyond its role as a processor that responds to demand developments elsewhere to become a source of final demand growth. This trend will be boosted by China's economic rebalancing. China thus has the ability to transmit real sector shocks through the global economy but to originate those shocks as well. The positive outward spillovers from China undoubtedly will increase, contributing significantly to the creation of a strong and balanced global growth if economic transformation is managed successfully.