China’s Transition to Slower But Better Growth

Growth slowing as vulnerabilities, notably credit growth, are reined in

Policies need to be calibrated to ensure orderly slowdown

Structural reforms key for creating new sources of growth

China’s growth is expected to be 6.8 percent in 2015, down from 7.4 percent last year. This slowdown, in line with the government’s target of around 7 percent, reflects progress in addressing vulnerabilities, especially a needed moderation in real estate investment. The recent stock market correction will not derail the ongoing adjustment to a slower yet more balanced growth path, the report says.

“The challenge now is to take the next steps to a more open and market-based economy,” said Markus Rodlauer, IMF mission chief for China. This will require bold structural reforms, such as moving to a more market-based financial system, improving the management of government finances, and leveling the playing field between state-owned enterprises and the private sector.

“We also believe that China can, and should, aim for an effectively floating exchange rate regime within 2–3 years,” said Rodlauer. In this regard, the IMF noted that the new mechanism for determining the central parity of the Renminbi announced by the central bank is a welcome step as it should allow market forces to have a greater role in determining the exchange rate. Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets.

In its annual assessment, the IMF urges the government to push forward with structural reforms and accept lower growth in the short term to secure sustainable and stable growth in the long run—a trade-off that is worth making and in China’s best interest.

New direction underway

Since the global financial crisis, China has relied on an unsustainable growth model of excessive credit and investment, which has created large vulnerabilities in the fiscal, real estate, financial, and corporate sectors.

Moving to a more sustainable growth path requires reversing these trends. The Chinese leadership has set out a comprehensive reform agenda and has made considerable progress in reducing these vulnerabilities, the report points out. Credit growth has slowed significantly over the past few years, and shadow banking (borrowing from nonbank financial entities) has been reined in. Investment is cooling, led by a reduction in residential real estate growth. And...