China Prospects

Independent Films, Interviews, Politics

Financial liberalization will be essential in transforming China’s economic model to one of more inclusive growth, raising household income, boosting domestic consumption, and reducing the reliance on exports as an engine of growth, say IMF economists in their annual assessment of the world’s second largest economy.

In their regular Article IV report, IMF economists focused on the need to revamp China’s financial system with a comprehensive set of reforms that strengthen the conduct of monetary policy, improve the financial stability framework, develop financial markets and savings vehicles, and move toward more market-determined loan and deposit interest rates. The assessment follows a visit by a team of economists led by Nigel Chalk, the IMF’s mission chief for China.

This year, for the first time in China, the IMF, in collaboration with the World Bank, also conducted an assessment of the health of the Chinese financial system under the Fund’s Financial Sector Assessment Program (FSAP). The FSAP marked the culmination of over a year of work by Fund, World Bank, and outside financial sector experts.

The Article IV report notes that, currently, China’s system leaves many depositors short-changed with deposit rates well below the rate of inflation. While this helps to sustain high levels of corporate investment and foreign currency intervention, it conflicts with many of the objectives of the government’s 12th Five Year Plan.

The Article IV report recognized that financial liberalization was likely to be a complex and lengthy process, which would need to be carefully sequenced.

The annual report also discussed the main near-term risks to the Chinese economy including the danger of rising inflation. IMF economists expect inflation to decline in the second half of this year—it rose to 6.4 percent in June—as the impact of higher food prices eases somewhat.

In recent years, many China watchers have been concerned about the threat of a property price bubble in Asia’s largest economy, where the property sector directly makes up 12 percent of GDP.

In their report, IMF economists said they did not see imminent risks of a major downturn in the sector, but they warned that as long as the cost of financing continues to be low, and other investment options remain limited, “the propensity for property bubbles will remain.”

The FSAP report concluded that China had made “remarkable progress” in its transition to a more market-based and financially sound system. Consequently, the banking sector had entered the global financial crisis from a position of relative strength.

But the report noted that the country’s financial sector was confronting several risks not only from rising real estate prices and economic imbalances, but also from a likely worsening of credit quality following the enormous injection of stimulus in response to the global financial crisis.

Directors:

• Muhamed Sacirbey (UNTV-IMF)

Producers:

• Susan Sacirbey (UNTV-IMF)