IMF calls on China to ease policies further as economy rebounds

IMF calls on China to ease policies further as economy rebounds
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(Feb 3): China should shift government spending to benefit households, ease monetary policy further and take more actions to help the property sector in 2023, according to the International Monetary Fund (IMF).

Authorities need to prevent a premature policy tightening and also accelerate structural reforms such as levelling the playing field between state-owned and private enterprises to lift long-term growth prospects, the IMF said in a report released on Friday (Feb 3).

The IMF sees a “recovery for an economy that’s still operating below potential” in 2023, said Sonali Jain-Chandra, the mission chief for China, during a press briefing on Friday. “Additional monetary easing is needed,” and inflation pressure are muted, she said.

Services sector activities have rebounded quickly this year after the abrupt exit from Covid zero policy in December led to a swift peak in infections, although the recovery of the industrial sector has been muted due to the Lunar New Year holiday. The IMF projects the Chinese economy will expand 5.2% this year, up from 3% in 2022, driven by a rebound in private consumption. 

That expected recovery in Chinese demand after the reopening was one reason the fund raised the projection for global growth earlier in the week. 

The impact on global inflation from China’s economic reopening and rebound will be “limited” as energy prices have been declining and will stay lower than projected, according to Thomas Helbling, the IMF’s deputy director for the Asia and Pacific department. 

The increase in China’s imports will be stronger among services rather than goods, he said, and the recovery of outbound tourism will have a strong spillover impact on neighbouring Asian countries such as Thailand and the Philippines. 

The authorities can boost consumption through temporary cuts in social security contributions for workers and direct transfers to households in regions most severely impacted by Covid-19 outbreaks, the IMF said in the annual Article 4 report. The e-CNY, the digital legal currency currently being trialled in over a dozen regions, could play an important role in this effort, according to the IMF.

Additional interest rate-based easing can ensure monetary conditions remain accommodative and help repair balance sheets, the IMF said. 

The government should also increase funding for completion of unfinished housing projects and promote market-based restructuring of troubled property developers, according to the report.

The IMF also urged authorities to reform the fiscal framework to address “unsustainable” local government finances dependent on real estate for revenues and collateral for off-balance sheet borrowing. A property tax should be introduced in the longer term to help the sector transform to a more sustainable model, the IMF said.