September 22, 2020

I.M.F., Predicting Slower Growth for China, Urges Overhauls

HONG KONG — The International Monetary Fund on Wednesday trimmed its growth forecast for China, flagged concerns about the rapid expansion in lending in the country’s vast economy and urged a “decisive” push for overhauls it argues would put the economy on the path toward sustainable growth.

The lowered forecast — the I.M.F. shaved a quarter of a percentage point off its previous projection for 8 percent growth in China, to 7.75 percent — was the latest in a string of similar reductions by analysts in recent weeks. And although the new projection remains above the Chinese government’s target of 7.5 percent growth, the I.M.F.’s revision and comments underlined the challenges facing policy makers as they try to revamp the world’s second-largest economy after the United States.

Chinese government data for the first quarter of the year showed that the pace of economic growth had slowed to 7.7 percent — markedly below what most analysts had expected. Other economic data for April and May also have been lackluster.

In the short term, recent credit expansion, combined with a mild pickup in the global economy, is expected to lift China’s growth rate in the second half of this year, the International Monetary Fund said after concluding an annual review of the Chinese economy.

But longer term, major efforts are needed to rebalance the economy and address problems like soaring income inequality and environmental degradation, which built up amid the headlong expansion of the past few decades.

The rapid growth in credit in recent years also has emerged as a major source of concern among analysts, who worry that the accumulation of debt brings substantial risks, including asset price bubbles and potentially destabilizing defaults.

The I.M.F. added its voice to the chorus of warnings about the so-called shadow-banking system — lending outside the regulated banking system, which has been growing rapidly in the past few years.

The growth in credit, the I.M.F. said, “raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system.” Growth, it added, has become “too dependent on the continued expansion of investment, much of it by the property sector and local governments whose financial position is being affected as a result.”

Policy makers in Beijing are well aware of these issues and are aiming to bring about more balanced, higher-quality growth that will improve living standards and household incomes.

The I.M.F. said it was “reassured” by the authorities’ focus on the financial sector and fiscal reforms, adding that “reining in total social financing growth is a priority and will require further tightening of prudential oversight.” Such policies may slow activity in the short term, the I.M.F. said, but they would do so “in a way that supports the transition to a more sustainable growth path.”

While China still has “significant policy space and financial capacity to maintain stability” the I.M.F. said, “the margins of safety are narrowing” and a “decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path.”

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