China’s economic outlook

“The Chinese economy continues to perform strongly,” according to the International Monetary Fund, which recently completed a country report on China following annual discussions with the People’s Republic of China.

While China’s GDP growth reached an impressive 6.9 percent in 2017 on the heels of a cyclical rebound in global trade, growth is expected to slow slightly to 6.6 percent this year because of a delayed effect from financial regulatory tightening and softer external demand.

In exploring China’s economic outlook, the IMF mentions six key points (and charts) at the heart of the report:

1. China’s strong GDP growth continues. The country now accounts for one-third of global growth, with more than 800 million people now out of poverty and the country having achieved upper middle-income status.
2. A focus on high-quality growth. After decades of high-speedgrowth, the Chinese government is now focusing on high-quality growth, representing a historic juncture for the country. Authorities must focus on: continuing to rein in credit growth, accelerating rebalancing efforts, increasing the role of market forces, fostering openness and modernizing policy frameworks. In addition, even with a gradual slowdown in growth, China could become the world’s largest economy by 2030.
3. Credit growth has slowed but remains too fast. Determined actions over an extended period may be necessary to address underlying vulnerabilities. Despite the sharp rebound in nominal GDP and industrial profits, total nonfinancial sector debt still rose significantly faster than nominal GDP growth in 2017. While the corporate debt to GDP ratio has stabilized, government and especially household debt is rising, driven by continued strong off-budget investment spending and a rapid increase in mortgage and consumer loans.
4. China, a global digital leader. Digitalization will continue to reshape the Chinese economy by improving efficiency, softening — but not reversing — slowing growth as the economy matures. China has about 700 million Internet users and 282 million digital natives (Internet users under 25 years old) eager to adopt new technology. The massive scale of the Chinese market and a supportive regulatory and supervisory environment in the early years of digitalization made China a global leader in frontier industries such as e-commerce and fintech.
5. Rebalancing efforts should be accelerated. Increases in health, education and social transfers — financed by taxes on income, property and carbon emissions — would support consumption, and reduce income inequality and pollution. A more comprehensive approach to structural reforms, such as increasing transfers to the regions most affected by overcapacity reduction or pollution control, could help address the tensions across rebalancing dimensions.
6. The benefits of faster reform. Risks are tilted to the downside, with tightening global financial market conditions and rising trade tensions. If the authorities move more decisively to resolve the policy tensions now and focus on higher-quality growth and a greater role for the market, near-term growth would be weaker but longer-term growth would be stronger and more sustainable. An illustrative “proactive” scenario features faster reform progress, particularly state-owned enterprises reform and resolving zombie firms, which also accelerates rebalancing from investment to consumption. If there is a risk of a too-sharp slowdown, a temporary fiscal stimulus package with resources to support rebalancing could help cushion the near-term adverse impact.