China May Refrain From More Easing, IMF Official Says

IMF Says China Downside Risks Significant as Growth Pace Slows
Shoppers walk through a dry goods market in Changsha, Hunan Province, China. Photographer: Nelson Ching/Bloomberg

China may refrain from stepping up its monetary stimulus or increasing spending because measures now in place are sufficient to support growth, the International Monetary Fund’s top official in the nation said.

Authorities will probably maintain the “status quo” after already shifting their monetary stance to a “more neutral or accommodating one” and may forgo expanding this year’s budget, Il Houng Lee, 54, the IMF’s senior resident representative in China, said in an interview yesterday in the fund’s Beijing office.

Lee’s comments reflect confidence at the IMF, which last week cut its China growth forecasts three months after releasing updated projections, that the pace of expansion will accelerate in the second half of 2012. Premier Wen Jiabao’s government enacted two interest-rate cuts in a month and accelerated approval of investment plans to stem six quarters of deceleration in the world’s second-largest economy.

“Broadly what they have been doing has already been adequate to ensure that the economy is bottoming out,” said Lee, head of the IMF’s China office since 2010. “They most likely maintain the current status quo,” he predicted. Authorities “will most likely allow credit growth to continue to increase,” while avoiding the record scale of lending in the aftermath of the global financial crisis, Lee said.

Rate Cut

The IMF official didn’t rule out another rate cut, saying a drop in the inflation rate could prompt such a move. Meantime, the government sees “adequate space in the existing budget to continue to adjust policies to support growth,” assuming Europe’s debt crisis doesn’t worsen, he said. Revenue may come in above projections, allowing higher spending, he said.

The IMF issued an annual review late on July 24, saying that while China’s economy “seems to be undergoing a soft landing,” achieving that is a key challenge. “China is well placed to respond forcefully, if needed, to a deterioration of the external environment, in particular through fiscal policy,” the Washington-based lender said.

The fund repeated its forecast from last week that China’s economy will expand 8 percent in 2012, compared with the 8.2 percent seen in April. It sees an acceleration 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.

Leaders have implemented stimulus as the Communist Party prepares for a once-a-decade leadership succession, starting later this year.

Political Dynamics

“Our baseline scenario assumes no disruption” from the leadership shift, Lee said. Asked if domestic or foreign investment decisions are being postponed, Lee said that he “would have thought that uncertainties in the global economy were much larger than the uncertainty, if any, over the political risks here.”

The IMF on July 24 reiterated its assessment that the yuan is “moderately” undervalued, which China disputed. The fund omitted an estimated range for the currency’s undervaluation that was included in an earlier draft, according to two officials at the fund who had seen the previous language and spoke on condition of anonymity.

With a slowdown in export growth, China has overseen a weakening in the yuan 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 fell less than 0.1 percent against the dollar to 6.3885 yesterday.

Yuan Policy

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.

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

Markus Rodlauer, head of the IMF’s China team, asked why estimates of the yuan’s undervaluations were left out this year, said on a conference call with reporters that “numbers tend to get a life of their own.” Some estimates will appear in a separate exchange-rate report to be issued “shortly,” he said. Last year’s report gave a range of 3 percent to 23 percent for the undervaluation.

Bill Murray, an IMF spokesman, declined to comment on the omission of the yuan’s estimated undervaluation that was in an earlier draft.

‘Significant’ Risks

IMF directors “noted that the pace of activity has slowed and downside risks are significant,” the fund said on July 24. 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 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.

Gome Electrical Appliances Holding Ltd., China’s second-biggest electronics retailer, warned on July 24 it may post a first-half loss as revenue declined and its e-commerce unit was unprofitable. Gome and larger Suning Appliance Co. last year benefited from government subsidies on home-appliance purchases.

— With assistance by Sandrine Rastello

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