China Should Resist Further Stimulus, IMF Says

China should refrain from rolling out more stimulus to boost economic growth and continue to implement changes to curb dangers from shadow banking and local government debt, the International Monetary Fund said.

“We are not counseling stimulus at this point, we don’t think that there are any sufficient signs to warrant that,” First Deputy Managing Director David Lipton said at a briefing in Beijing today.

China’s government is trying to sustain growth without implementing a stimulus on the scale of the $586 billion policy boost begun in 2008 that caused a record buildup of debt and inflated asset bubbles. The State Council, which last week said there was “relatively large” downward pressure on the economy, has so far resisted broader monetary-policy easing to curb debt that JPMorgan Chase & Co. estimates surged to 210 percent of gross domestic product last year.

“We consider that vulnerabilities have risen to the point where containing them should be a priority and therefore further stimulus should only be deployed if growth slows significantly below this year’s growth target,” Lipton said at a briefing after two weeks of talks with Chinese officials for the Washington-based lender’s annual assessment of the nation’s economy.

Premier Li Keqiang in March set a goal for an increase of about 7.5 percent in GDP this year, the same as in 2013. Lowering the target to around 7 percent next year “would be consistent with the goal of transitioning towards a sustainable growth pattern,” Lipton said.

Alternative Support

China’s economy expanded 7.7 percent last year and in 2012, the weakest pace since 1999 in the aftermath of the Asian financial crisis and down from an average 10.6 percent in the previous decade. Growth may ease to 7.3 percent this year, according to the median estimate of 51 analysts in a Bloomberg News survey last month.

The government needs to find alternative ways to support the economy if there’s a deeper slowdown, Lipton said. The government should pursue its goal of reorienting the economy away from credit, investment and exports toward strengthening household income and consumption, he said.

“In the event of a slowdown we would prefer to see policies that were supportive in that way,” he said.

China has become too dependent on credit and investment, including in real estate since the global financial crisis, the IMF said in a statement today.

Rising Risks

“Continuing reliance on credit-fueled growth means that risks are still rising, and although the government still has sufficient buffers to prevent a disorderly adjustment and sharp growth slowdown in the near-term, continued efforts to reduce vulnerabilities are a high priority,” according to the statement.

China’s total non-financial debt rose to 210 percent of GDP in 2013 from 197 percent in 2012, Zhu Haibin, JPMorgan’s Hong Kong-based chief China economist said in a report this week. Corporate debt rose to 130 percent of GDP in 2013 from 92 percent in 2008, he estimated.

While China has taken steps to rein in excessive growth in shadow banking and strengthen control of local government borrowing, the authorities agreed during talks with the IMF that “much remains to be done,” according to the statement.

Priorities for the government should include fiscal reforms and strengthening local government finances, liberalization of deposit rates and the introduction of deposit insurance to remove distortions in the pricing of risk and borrowing costs, the IMF said.

Currency Intervention

China also needs to implement changes to bring its current account surplus “into line with fundamentals” which would support the country’s economic transition away from investment and saving, according to the statement. These include greater exchange-rate flexibility through further widening the yuan’s trading band and reducing currency intervention “so that the exchange rate can find the market-clearing level as soon as possible,” the IMF said.

The lender reiterated its view that the yuan’s real exchange rate is “moderately undervalued.”

China’s exchange rate is undervalued by 5 percent to 10 percent on an inflation-adjusted basis given the fundamentals of the country’s economy, the IMF staff said in a report released in August.

The yuan, which has strengthened about 33 percent against the dollar since a peg ended in July 2005, has fallen more than 3 percent against the U.S. currency this year.

— With assistance by Kevin Hamlin

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