Financial Reforms Critical to Transforming Chinese Economy

China a bright spot in global growth

Inflation expected to start declining later this year

Financial liberalization will help rebalance China's economy

In their regular Article IV assessment of the country’s economy, IMF economists called for a revamp of China’s financial system with a comprehensive set of reforms that strengthen the conduct of monetary policy, improve the financial stability framework, develop financial markets and savings vehicles, and move toward more market-determined loan and deposit interest rates.

The assessment follows a visit by a team of economists led by Nigel Chalk, the IMF’s mission chief for China. This year, for the first time in China, the IMF, in collaboration with the World Bank, also conducted an assessment of the health of the Chinese financial system under the Fund’s Financial Sector Assessment Program (FSAP). The FSAP marked the culmination of more than a year of work by IMF, World Bank, and outside financial sector exports.

“In our surveillance work, we have taken up this financial theme and focused on laying out a clear, strategic roadmap to manage the process of financial liberalization in the coming years, in a way that both reduces the risks and delivers the full benefits of a more market-based financial system,” said Chalk.

“Financial reform will be of great help in rebalancing China’s economy,” he added.

Financial reforms beneficial to depositors

The report notes that China’s system currently leaves many depositors short changed, with deposit rates well below the rate of inflation. While this helps to sustain high levels of corporate investment and foreign currency intervention, it conflicts with many of the objectives of the government’s 12th Five Year Plan.

The IMF team visited Beijing, Shanghai, and Chengdu from May 23 to June 9 to conduct the annual review and presented their findings to the Executive Board of the IMF on July 15.

Both the FSAP and a separate report on the spillovers to the global economy from China’s policies were also discussed by the Executive Board.

At the conclusion of his visit to China in June the IMF’s then Acting Managing Director, John Lipsky, paid tribute to the authorities for their adept handling of the economy during the recent global crisis. He said the country’s economy was a “bright spot” of global growth.

Exchange rate an important complement

In moving ahead with financial liberalization, the staff team highlighted the importance of allowing...