20220127-IMF-People_s_Republic_of_China_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_People_s_Republic_of_China_134页_2mb

2021 Article IV Consultation Summary: People's Republic of China

Core Content

The 2021 Article IV consultation with the People's Republic of China, conducted by the IMF, evaluated the country's economic recovery, policy measures, and structural reforms. The consultation concluded that China's recovery from the impact of the pandemic is well advanced but remains unbalanced and lacks momentum due to several factors, including the rapid withdrawal of policy support, slow consumption recovery, and reduced real estate investment.

The IMF's Executive Board noted that China's GDP growth was projected at 7.9% in 2021 and 4.8% in 2022, with the slowdown in 2022 attributed to fading base effects and subdued private consumption and real estate investment. Core CPI inflation was expected to remain subdued and below the target of about 3%. The current account surplus was projected to narrow to 1.5% of GDP in 2022 from 1.8% in 2021.

Main Views

• Macroeconomic Policy Tightening: Fiscal policy became contractionary in 2021, with a significant reduction in public investment. Monetary policy also tightened, with key money market rates increasing and credit growth slowing.
• Unbalanced Recovery: Despite strong vaccination rates, the recovery has been uneven, with the services sector particularly affected by repeated lockdowns. Consumption remains weak, and real estate investment has slowed.
• Structural Reforms: Progress on structural reforms has been uneven, with little advancement in key areas like state-owned enterprises (SOEs) and competitive neutrality. Regulatory measures in the technology sector have increased policy uncertainty.
• Climate Strategy: China's climate strategy has begun to take shape, with action plans released to reach peak carbon emissions by 2030 and carbon neutrality by 2060. However, the adjustment path is steep and backloaded, leading to higher decarbonization costs.
• Financial Sector Risks: Financial vulnerabilities, particularly in the property sector, remain high. The IMF encouraged the authorities to address corporate leverage and improve market-based insolvency frameworks.
• Multilateral Role: China's role in global efforts to combat the pandemic and support low-income countries was acknowledged, including vaccine distribution and SDR rechanneling.

Key Information

Economic Indicators (2016–2026)

Main Recommendations

• Fiscal Policy: Continue fiscal support to strengthen social protection and promote consumption and services sector growth.
• Monetary Policy: Maintain an accommodative stance, with interest rate-based policies and greater exchange rate flexibility.
• Structural Reforms: Accelerate reforms to enhance productivity, including opening up domestic markets, improving corporate governance, and ensuring competitive neutrality between SOEs and private firms.
• Regulatory Measures: Implement regulatory measures in the technology sector in a transparent and predictable manner to reduce policy uncertainty.
• Climate Strategy: Accelerate decarbonization efforts using a comprehensive approach that combines economic rebalancing with carbon pricing tools and green finance.
• Financial Sector: Improve market-based insolvency and resolution frameworks, and address risks in the property sector through enhanced monitoring and policy coordination.
• Global Cooperation: Continue multilateral efforts to address global challenges, including pandemic response, climate change, and international trade.

Summary of Key Issues

Context

• China's recovery from the pandemic is well advanced but lacks balance and momentum.
• The slowdown is due to the rapid withdrawal of policy support, slow consumption recovery, and reduced real estate investment.
• Regulatory measures in the technology sector have increased policy uncertainty.
• China's climate strategy is in development, with action plans to reach peak emissions by 2030 and carbon neutrality by 2060.

Developments

• Policy Focus Shift: Authorities shifted focus from supporting recovery to deleveraging, leading to a contractionary fiscal and tighter monetary policy.
• Unbalanced Recovery: The recovery remains unbalanced, with the services sector significantly impacted by repeated lockdowns.
• Structural Reforms: Progress on reforms has been limited, particularly in removing implicit guarantees for SOEs.
• Climate Commitments: China's climate strategy is ambitious but faces high adjustment costs due to a steep and backloaded path.
• Financial Sector: Financial vulnerabilities remain high, especially in the property sector.
• Global Role: China plays a key role in global efforts to address pandemic and climate challenges.

Outlook

• The recovery is expected to remain weak in 2022 with significant slack in the economy.
• Continued policy support and structural reforms are essential for securing sustained high-quality growth.
• The transition to a green economy and a consumption-driven growth model is crucial for long-term stability and growth.

Policies

• Rebalancing: Continue fiscal and monetary policies that support economic rebalancing and inclusive growth.
• Green Transition: Implement a comprehensive approach to decarbonization, including carbon pricing and green finance.
• Productivity Growth: Enhance domestic market openness and SOE reforms to boost productivity.
• Financial Stability: Improve insolvency frameworks and monitor risks in the property sector.
• Global Engagement: Strengthen multilateral efforts to support global recovery and address shared challenges.