The International Monetary Fund reports that due to the recovery of the economy taking its toll, China is required to contain its financial stability risks.
According to a Washington- based lender in its annual Article IV report states that, Virus relief measures that are “potentially distortionary” should be gradually phased out. The article also states that repayment holidays for borrowers and relaxed rules on how to treat non-performing loans “run the risk of jeopardizing the progress in strengthening bank transparency and governance.
According to the Fund, the current pandemic has increased the debt levels hugely particularly within the private sector and due to the slacker rules with the banks the credit quality also seems to have deteriorated.
While Chinas ambition is to double the size of their GDP by the year 2035, which points towards a growth rate of 4.7% – 5% over the next 15 years, the IMF’s projection indicates that the year 2021 will see Chinas economy grow to 7.9% and gradually lessen to 5.2% in 2025.
Yet, the IMF states that the recovery has been irregular with the lagging of the private demand in the industrial and export growth.
“It’s crucial to look below the headline number and what we see there is growth that is not yet as balanced as we would like to have,” Helge Berger, head of the fund’s China mission, said in an interview with Bloomberg Television Friday. “Growth is still relying heavily on public support, namely in the form of more traditional public infrastructure investment. What is lagging is consumption.”
A shift in its fiscal policy away from spending on infrastructure and re-directing it to supporting households and solidifying social safety nets was recommended by the IMF to the Chinese Government.
The IMF in its report has stated that “Establishing a reliable and effective social safety system that sends transfers to low-income households during economic downturns would provide high impact support to the recovery,” It further stated that, It would also make growth more resilient by reducing the high household savings rate and reinvigorating economic rebalancing toward private consumption over the medium term.”
It is said that in an effort to get back the inflation rate to a sustainable level and to avoid excessive tightening of financial conditions, the monetary policy should remain accommodative. The Fund further stated that in an effort to safeguard potential risks regulatory and supervisory frameworks which includes macro prudential policy framework and on-line lending regulations should be strengthened.
The IMF has indicated that under the fund’s baseline scenario, the general Government debt is estimated to climb to 92% of the GDP and reach 113% by 2025. The debt of the local government financing vehicles and other off-budget activity, as well as normal on-balance sheet borrowings are augmented in the fiscal numbers.
In a latest policy statement, the Central Bank of China gestured its intention of paying extra attention to risk prevention and every effort to stabilize the debt level in the 2021 economy. This being said, the People’s Bank of China while trying to maintain sufficient support for the economy’s recovery, is pursuing to elude a swift shift in its monetary policy.
