IMF Occasional Paper: China's rising economic clout magnifies urgency of its reforms

• Pages: 210-212

Page 210

IMF SURVEY: Not so long ago, there seemed to be widespread wariness about China's trade expansion and its growing economic clout in Asia. Those fears seem to have diminished considerably.

PRASAD: External trade has been a key part of China's remarkable success. It is clear, as our research by Thomas Rumbaugh and Nicolas Blancher indicates, that China has become a major processing hub for exports from the rest of Asia to the industrial world. This has enabled many efficiency gains within the region and allowed other Asian economies to pursue greater specialization based on their comparative advantage. Asia is also benefiting from China's voracious appetite for imports-both for processing for export and for domestic consumption.

Over the past few years, while global economic growth was relatively weak, China's dynamism helped sustain growth within the region. And on a global scale, China accounted for almost one quarter of world growth over the past two years measured in terms of purchasing power parity.

One of the key reasons we have pulled together our recent research into an Occasional Paper is the increasing regional and global interest in the Chinese growth experience and the challenges facing the country. The rising need to understand how its policies translate into macroeconomic outcomes and their potential international spillovers have really put China's policy challenges at center stage.

IMF SURVEY: Asia and the world may now view China's growth much more positively, but they are correspondingly much quicker to become alarmed by any prospect of this growth being derailed. Can China sustain its rapid growth, and is there a risk of overheating?

PRASAD: The fundamental strength of China's macroeoconomy was evident last year when it shook off the effects of the SARS epidemic and posted very strong growth. But maintaining stable and balanced growth does represent a very significant challenge for policymakers. Reforms of the banking and state enterprise sectors will have to be combined with measures to tackle high levels of unemployment and underemployment, poverty that remains widespread despite recent progress, and widening regional disparities in income. In addition, periods of rapid growth-such as the one China has recently been experiencing-inherently carry the risk of a buildup in imbalances.

There has lately been a great deal of concern expressed about the potential for overheating, and we share this concern. Tarhan...