June 5, 2019

Moderator:

Ting Yan, Press Officer, Communications Department, IMF

Speakers:

Kenneth Kang, Deputy Director of The Asia & Pacific Department, IMF

Alfred Schipke, Senior Resident Representative, IMF

MS. YAN: Good afternoon everyone. Welcome to this IMF Press Conference on China Article IV Consultations, which is the annual assessment of the Chinese Economy.

My name is Tin Yan. I'm the Press Officer of the IMF. Let me first introduce our speakers today.

Sitting beside me in the middle is Mr. Kenneth Kang, Deputy Director of the Asia & Pacific Department of the IMF. On his right is Mr. Alfred Schipke, IMF's Senior Resident Representative for China.

Mr. Kang will have some opening remarks first, and then we'll be happy to take your questions.

Let me also stress that today's press conference is on China and our preliminary findings of the Article IV Mission, so we won't be able to go beyond China. And you should all have received the hard copies of the press release, which has also been published on IMF.org.

With that, let me give the floor to Mr. Ken Kang.

MR. KANG: Okay. Thank you, Ting. And thanks very much for coming this afternoon. After the slowdown in 2018, Chinese economic growth stabilized in 2019 reflecting a wide range of policy support. Renewed trade tensions however, remained a source of uncertainty, which is weighing on sentiment.

Our discussions in the past few weeks have focused on the authorities’ policy agenda to support the economy amid rising trade tensions while continuing progress in shifting from high-speed to high-quality growth.

Growth is expected to moderate to 6.2 percent and 6.0 percent in 2019 and 2020, respectively, as the planned policy stimulus partially offsets the negative impact from the recent U.S. tariff hikes on $200 billion of Chinese exports.

Growth is expected to gradually slow to 5.5 percent by 2024 as the economy moves towards a more sustainable growth path. Headline inflation is projected to rise to 2.3 percent in 2019, reflecting higher food prices.

The near-term outlook remains particularly uncertain given the potential for further escalation of trade tensions.

The policy stimulus announced so far is sufficient to stabilize growth in 2019 and 2020 despite the recent U.S. tariff hikes. No additional policy easing is needed, provided there are no further increases in tariffs or a significant slowdown in economic growth.

Exchange rate flexibility should increase to facilitate adjustment to the new external environment. However, if trade tensions escalate further, putting at risk economic and financial stability, some additional policy easing would be warranted. For example, a fiscal expansion, which is centrally financed, pro-rebalancing, and targeted to low-income households, could be used to stabilize the economy.

The global economy would benefit from a more open, stable, and transparent, rules-based international trade system. China and its trading partners should work constructively to address shortcomings in the trading system, and enable a system that can more readily adapt to economic changes in the international environment.

China can also play an important role and benefit from further opening up and other structural reforms that enhance competition. Trade tensions between the U.S. and China should be quickly resolved through a comprehensive agreement that supports the international system and avoids managed trade.

Turning to the financial sector, credit growth and corporate debt have been reduced thanks to concerted efforts to strengthen financial regulation, reduce regulatory arbitrage, and improve the framework for financial supervision.

Going forward, the priority should be to fully implement the announced regulatory reforms and continue with structural regulatory reforms to reduce still-elevated vulnerabilities. Bank capital, especially for small and medium-size banks, should be strengthened and micro-prudential regulations should not be relaxed, even temporarily for cyclical reasons, or to offset tighter domestic financial conditions.

To improve credit allocation and efficiency, policies should increase lending to the private sector, should be complemented with a comprehensive plan to remove the implicit guarantees for state-owned enterprises.

China has made welcome progress in reducing external imbalances over several years, and the external position in 2018 was broadly in line with medium-term fundamentals and desirable policies. Enhancing the social safety net with a more progressive tax system would help prevent external imbalances from re-emerging by discouraging excessive household savings and boosting consumption.

Greater exchange rate flexibility and better-functioning foreign exchange markets would help the financial system prepare for more volatile capital flows.

Finally, progress on structural reforms has led to a further opening up of the economy and a greater role for market forces. Such structural reforms should continue to boost productivity and longer-term growth. Liberalizing product and labor markets and further opening up the service sector would increase competition and flexibility and allow China to benefit further from globalization.

SOE reform should continue and help achieve competitive neutrality by hardening SOE budget constraints and removing their implicit guarantees. Managing China’s increasingly systemic and complex economy requires modernizing policy frameworks towards more market-based and transparent frameworks.

Thank you. I'd be happy to take any of your questions.

MS. YAN: Thank you, Ken. Now we are happy to take your questions. Please identify yourself with name and affiliation. Thank you.

QUESTIONER: Thank you. I'm a little bit astonished about one conclusion that you just told us that credit growth and corporate debt has been reduced, thanks to concerted efforts. When we look at the economic data at the moment, it looks like the debt from all fronts, especially household debts, are increasing very quickly and too quickly, but that's from my observation -- how do you explain that contradiction? Thank you.

MR. KANG: On your question about credit growth, let me just step back and just note that the rapid credit growth over the past decade has increased financial vulnerabilities. So, we just very much welcome the reforms of the financial sector, and the steps taken to slow the pace of credit growth.

On the point you mentioned about household debt. That's correct. Household debt has increased rapidly in China; it's now about 50 percent of GDP compared to 20 percent of GDP just 10 years ago. Or if you have a set of macroprudential tools available, such as loan-to-value ratios, which they can use to address that risk from household debt.

Overall, we encourage the authorities to continue to pursue reforms of the financial sector to address these vulnerabilities and including by looking for ways to strengthen the ability of banks to assess the credit worthiness of their borrowers. That's one last to removing the implicit guarantees in the economic system.

QUESTIONER: I have two questions. The first one is about, what policies, what measures do you recommend to increase lending to the private sector? And the second one is about People’s Bank of China took over a local bank so -- because it's a recurring risk. Do you see more financial institutes having the same roles?

MR. KANG: Well, I'll take your second question first. As I noted before, if the rapid credit growth that it has taken increased financial vulnerabilities. And the authorities have taken steps to reform the financial system. As regulatory standards improve, you know, one would expect the consequences for weaker financial institutions and riskier financial products.

This is indeed expected and is appropriate. But we also very much expect that these consequences should be contained, not least because the supervisory authorities are managing very closely the situation, and have the tools available to address such risks.

That said, we continue to think the government should have plans to strengthen the capital positions of banks, to enhance the resilience, as well as look for ways to expand lending to the private sector. Measures such as further opening up sectors to private firms, hardening the budget constraints for state-owned enterprises, and looking for ways to strengthen banks' capacity to asset the credit risk and worthiness of lending to private firms.

QUESTIONER: I have a question about the policy response. You look forward to a fiscal expansion that is more pro-rebalancing, can you define that ”pro-rebalancing”? And the second question is, on the background of widening trade tensions, how China and its partners within the trading system that can more readily adapt to the economic changes? Thank you.

MR. KANG: So on the policy side let me just make three broad points. First, if tariffs remain at the current level, we see no need for further stimulus. In other words, the claimed stimulus so far is sufficient to stabilize growth by 6.2 percent which is well within the authorities' target range.

Second, if trade tensions escalate, for example, if U.S. were to impose additional tariffs, it's true that growth could be significantly affected. And in this situation some temporary stimulus could be appropriate. But even then the stimulus should be contained and focused on rebalancing growth sustainably.

But that remain, for example, a fiscal extension that reduces the relatively high social security contribution rate for low-pay workers, combined with increased spending on the social safety net, education, health and employment insurance, rather than expanding infrastructure spending through local governments would be the third option.

On your second question about trade; you know, as we mentioned many times before, everybody loses in a protracted trade war. If trade is threatened and trade is damaged, growth will suffer. For these reasons we encourage all parties involved to work together for a durable resolution that supports an open, stable, transparent, rules-based international trade system. This is in everyone's interest including and China of course.

QUESTIONER: You mentioned the possibility of further stimulus if tariffs continue to rise, should they also -- should the Central Bank also, if the renminbi goes through -- falls through sudden if tariffs continue to be hyped?

MR. KANG: On your question, in the event that tariffs do increase and there's a fraction of financial stability, some additional stimulus may be warranted. Our primary focus is on fiscal extension, but to the extent that the inflation outlook weakens, there could also be a role for monetary policy.

On the exchange rate, we do not comment on exchange rate movements, but the IMF, we do conduct a multilateral assessment of the exchange rate, and we do find that the renminbi in 2018 was broadly in line with the medium-term fundamentals and desirable policies.

In other words, the renminbi is not overvalued nor undervalued. At the same time we very much welcome the greater exchange rate flexibility that we've seen in recent years. A more flexible, and a more market-determined exchange rate will benefit China, and allow the exchange rate to serve as a shock absorber. And by also giving scope to monetary policy to address domestic conditions; initially, if they continue to encourage the greater flexibility of the exchange rate, and further improvements in the communications framework.

QUESTIONER: I just want to be clear. Your projection of the Chinese economy's growth for 2019 and 2020, has been lowered by 0.1 percent than your previous estimates in April. Is that right? And is it because from the estimation in China-U.S. trade wars since May, and which sectors in Chinese economy have been affected most by the trade war? And do you still think that China has enough policy tools to maintain Chinese growth above 6.0 percent? Thank you.

MR. KANG: First on, your question about the growth forecast. Yes. Compared to our previous projections for 2019 growth in the spring, we had revised down modestly growth for this year by 0.1 percentage point, to 6.2. This reflects the a combination of two factors. One is the negative impact of the tariff increases, and about 0.2 percentage points.

In a positive impact, and a somewhat more expansionary macro-policy stance, about 0.1 percentage point, so on average, if we assume that tariff remains at the current level we expect growth to slow modestly to 6.0 percent by 2020.

On your question about, you know, which sectors will be affected by the trade tensions, you know, that we take a broader view of the macro setting, we're not so much focused on detailed sectoral views, but that being said, one could expect the firms involved if -- to a prolonged trade conflict, those firms involved would be affected. So, this would include, say, commodity exporters, importers, those involved in Asian value chains, and as well as those involved in (inaudible) production.

At the same time other countries' sectors might gain as China continues to rebalance and mature. For example, consumption, services in higher value-added industries will expect to grow more quickly than, say, investment for lower value-added sectors.

QUESTIONER: I have two questions. You said -- first of all when you said, that renminbi is broadly in line with the financials. Is that still the case today? And also I wanted to say, a recent blog of the IMF had said that most of the effects with the affected U.S. tariffs, fall on the U.S. economy, and U.S. companies, and not Chinese companies. Is that still your view? And if so, why would there need to be a stimulus effort on the Chinese side, if tariffs -- U.S. tariffs were to rise, considering they're closely affected by the that tariff increase of the U.S. or the Chinese side. Thank you.

MR. KANG: Okay. On your first question about the exchange rate, a multilateral assessment was conducted from the exchange rate in 2018, and we have not updated for the recent movements of the renminbi. I think, in general sense, the renminbi will remain fairly stable, and there’s been a considerable volatility, we think the view that is sure being more determined and flexible. On your question about impact of the tariff increases, let me be clear , if tariffs do go up to, say, 25% across the board, that, with growth will be affected significantly. In this case, we do see a case for a temporary stimulus to support the economy, especially if there is a risk to economic and financial stability. We have a G-20 surveillance coming out later tonight. I think, which will go into more detail on how we see the global impact of the recent tariff tensions.

QUESTIONER: You just said that China’s economic growth can weaken significantly if tariffs were to increase. Is there a worst-case scenario? I mean that -- worst case scenario, what kind of growth numbers do you expect China’s growth to be. My second question is that some global analysts had forecasted that if the U.S. and China have tariffs for all the imports, the world is just a few quarters away from a global recession. So, how close is that -- do you -- to the IMF, do you think that assessment is fair?

MR. KANG: Okay. Let me just say that the direct impact of further escalation is highly uncertain, and it’s premature to speculate about the possible economic impact from potential additional tariffs. If growth were to slow sharply with threat and economic and financial stability, some temporary stimulus could be appropriate in this situation, but, as I noted before, it should be contained and focused on rebalancing growth sustainably. For example, this could be done through a fiscal expansion that essentially financed and is targeted to low-income households, and that is pro-rebalancing. So, assessing the impact of additional tariffs, you’d have to take into consideration both factors, both the negative impact of the tariff, as well as the positive impact from the policy response.

QUESTIONER: What kind of reforms, including the financial sector, do you actually see coming through this year and the next, given that economic growth is under pressure and Chinese firms are working on their trade tension, trade war with the U.S.?

MR. KANG: Okay. Thank you. On the question about reforms, I think our overarching policy remains unchanged. Despite the rising trade tensions, it’s important for the authorities to follow through on their objective of switching to high quality growth from high speed growth. This includes four main components in our view.

One is to continue the derisking and deleveraging to address financial vulnerabilities. Second is to look for ways to boost consumption, while slowing the pace of investment. Third is to increase the role of the private sector, who are further opening up trade and investment, and, fourth, there is a need to further modernize the policy frameworks in China, fiscal, monetary, financial, and even data, to better manage the increase in the complex Chinese economy.

In our view, despite the rising trade tensions, it is China’s long-term interests to continue with further opening up, and other structure reforms that enhance competition, and strengthen the role of the private sector in the economy.

QUESTIONER: I have two questions. The first one, I see that you also went to Guizhou, you choose this province and compared to Shenzhen last year, I remember, have you found any differences of these two provinces, cities?

Second one is the local government debt, this year is boom. So, I wonder how do you evaluate the strategy of the Chinese government. Do you think that it could raise the leverage rate, why? Okay. Thank you.

MR. KANG: Okay. Thank you for that question. I will turn to my colleague, Alfred Schipke, to address, here, the questions.

MR. SCHIPKE: What we try to do is -- when the team come to China, of course, we have discussions with the authorities in Beijing, but in order to get a better sense of what the countries, we try to go to different regions. This year we picked the region that in many respects, is still relatively poor in a sense of what is on the minds of the local government there, and, as you can imagine, poverty alleviation is a key, and, so, what we try to do is around our assessment on the economy.

When it comes to local governments, a few points. First of all, when I saw -- recognized that the authorities undertook a number of measures to reign in the debt of local governments, both from the financial sector side, they tightened the financial regulations, but also through measures by formally prohibiting local governments to borrow illegally. This is, of course, an area where we will continue to focus on because ensuring that local government debt, it is under control, that then should be -- the fiscal position improves -- requires a control of local government financing, but in general, the government has moved to a more rational framework, by what was frequently called closing back door and opening new front door, relying increasingly on the bond financing, and these are, of course, welcome steps.

QUESTIONER: Thank you. I have a question relating to interest rate liberization, because I remember last month, during an interview Mr. David Lipton, he said that this time, during the Article IV consultation, IMF will discuss with PBOC on this issue, like how to carry out this kind of interest rate liberization reform. I know this is an uphill climb, as it is kind a long-term path. So, maybe you can shed some light on this discussion?

MR. SCHIPKE: Maybe I could also respond to that. This is actually in the context of also strengthening the monetary policy framework. What the authorities have articulated, they want to move more toward an interest rate-based price-based monetary policy framework. Now, what that implies is that, eventually, China ought to be moving toward, like in other countries, focusing on short-term interest rate, like the repo rate, and, in order to do that, would ultimately -- we would try to de-emphasize the positive lending benchmark rate, and that is very much in line with our advice.

QUESTIONER: If I understand you right, you just said that the policy recommendation to the reforms are the same that you had last year. Do you think that at the moment, the atmosphere, under this trade trouble, probably, is still on these four points from the Chinese government, or are they going away from these four points?

MR. KANG: I think in terms of the authorities’ programs -- I think we are encouraged by the steps taken to continue with opening up of the financial sector. I think we’re also encouraged by reforms that -- to reduce the rapid pace of credit. I think we very much, you know, encourage those reforms to continue. At the same time, as we’ve highlighted in this constitution, we’ve focused on this concept of competitive neutrality, trying to level the playing field between state owned enterprises and private firms as ways to enhance the role of the private sector and improve the efficient allocation of resources in the economy. We very much welcome this initiative. We think enhancing competition, opening up sectors, more sectors, for private sector firms, and enhancing the -- and hardening the budgeting strings for state owned enterprises is very much in China’s long-term interests, putting aside the trade tensions, if this is what will help make the economy more flexible, more resilient, and more dynamic over the longer term.

QUESTIONER: Thank you. So, in terms of, like, additional stimulus, you said that you think the focus will be more on the fiscal side, but, for the PBOC, do you think it’ll be more monetary stimulus, for example, cutting the benchmark ratio, and, in that scenario, do you think there’s conflicting goals, here, because they’re trying to deleverage, but then they’re forced to ease. How do you think they should balance that out? Thanks.

MR. KANG: Okay. On monetary policy -- I think the PBC has taken appropriate action over the past year, and have reduced the reserve requirement rate several times, and we have seen a positive impact on that, in terms of yields coming down, and credit growth, particularly to small or medium sized enterprises, have also picked up.

Our recommendation is for monetary policy to very much focus on domestic conditions, and on the outlook and risks to inflation. At the same time, while we understand that administrative measures have been used to promote lending to the private sector, our view is that the policy should rely on -- more on market forces, rather than administrative targets, in order to ensure that the lending is done efficiently and sustainably. At the same time, this lending should be complimented by other reforms to help private sector to operate more efficiently in enclosed sectors, to strengthen the capacity of the financial system, to channel credit to the most productive uses among private firms, as well as further SOE reforms, hardening the budget constraint. We’re moving implicit guarantees to ensure that the efficient allocation of credit and resources in the economy.

QUESTIONER: You mentioned that the idea of competitive neutrality was a focus for this year’s discussions. Is that a reaction to the seemingly shift from the private sector back to the SOE sector from the Chinese government, and their emphasis on the economy, or is that something you’ve been planning for a while, and why is that.

MR. KANG: Okay. I think we welcome the initiative on competitive neutrality. I think, in the past, we have consistently recommended further SOE reforms, and other reforms, to expand the role of the private sector in the economy, and we find that this notion of competitive neutrality and trying to level the playing field between SOEs and private firms is a positive step in that direction. So, our idea for this consultation was to provide some concrete ideas on how that could be done, both on the side of SOE reforms, but also for ways, well, to improve the environment for the private sector in China. The private sector is a major driver of economic growth and jobs, and also for innovation and, so, it’s very much in China’s long-term interest to promote and continue with these efforts to report competitive neutrality.

MR. SCHIPKE: Maybe I could just -- let me reiterate. I think a key, here, is that state owned enterprises, okay, the private sector, especially when it comes to financing, benefit, and competitive neutrality looks at that and tries to see what the advantages are. So, a key component of our advice is to ensure that the conditions for both private and state owned enterprises are the same. As you know, state owned enterprises contribute about 20% or less, to that you add in employment, but in terms of access to the credit, that’s way beyond that, and that implies that the private sector doesn’t have insufficient financing, and you can lead that to the government’s effort, of course, as you highlighted, to ensure that the private sector has access to financing, and the government has put in place measures to support the private sector, but, in the end, it all comes back to, also, doing structure reforms that are needed, removing the implicit guarantees, and allowing zombie firms, for example, to exit.

QUESTIONER: So, some people in China have hoped that the trade tension could have forced China to do more reforms, like what you have recommended, but we’re seeing that state owned enterprises are actually playing a greater role. So, do you worry that as trade tensions escalate further, and could actually subdue reforms?

MR. KANG: See, our view is that, you know, putting aside the trade tensions, or even in response to the trade tensions, there is a need for China to continue along this reform path. It serves China well, over the past 40 years, and will continue to do so over the next 40 years. Further opening up the economy to trade and investment will allow the private sector to play a more important role in allocating resources and investing in creating jobs. So, I think this whole notion that we’ve been pushing about maintaining the momentum for reform, despite the headways from rising trade tensions, is a very important theme for us, when we look at China.

QUESTIONER: So, my question is about the supply chain. Have you talked to any enterprises, both foreign and local? Have they considered moving the factories abroad, and if they are, and how serious is the situation? Can you talk more about it?

MR. KANG: We have not looked deeply into this issue of whether or not companies have looked at decisions to how they’re responding. I think you’re right, that this period of uncertainty has held back spending. It is getting in the way of business sentiment. So, it is a concern that we will enter a prolonged trade conflict. This could start to distort business decisions. I think it’s critically a concern now that supply chains and the nature of production have become ever more complex, and, therefore, it is so important, therefore, to rely on having a stable, open, transparent international system to allow these businesses and supply chains to flourish. The expansion of these supply chains has allowed many countries to participate and benefit from the rise in global trade. So, now -- it’s very important that the -- these trade conflicts be addressed quickly to a solution that supports the international trade system.

MS. YAN: Thank you, Ken and Alfred, and thank you, everyone, for coming today. This concludes our press conference. Thank you.