China: more flexible exchange rate could assist monetary policy

• Pages: 285

Page 285

China is continuing to grow rapidly, according to the IMF's recent review of the economy. GDP growth reached 10 percent in 2005, roughly the same as in 2004, and is projected to grow at that level in 2006 and 2007. Net exports and investment continue to expand rapidly, and strong world demand and China's increasing role in global processing trade drove export growth. A slowdown in import growth resulted in a current account surplus of more than 7 percent of GDP, up from 3½ percent in 2004. Despite some tightening of monetary policy and administrative controls, investment growth continued to be strong. The recapitalization of three large state-owned commercial banks has improved bank operations. State-owned enterprises have become more market oriented, and corporate and management restructuring has continued.

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Discussing the IMF review, Executive Directors commended the authorities for sustaining high economic growth. They broadly supported the government's medium-term economic reform strategy, particularly the need to rebalance the economy away from heavy dependence on investment and exports for growth, and toward consumption. Additional monetary policy actions are needed, particularly by stepping up open market operations to drain liquidity from the banking system. Directors...