The International Monetary Fund has been on a mission to China and experts are warning the Asian giant to reduce “distorting” supply-side policies that support manufacturing sectors. This warning comes at a time when United States and the European Union They accuse the country of subsidizing its industry, generating overcapacity that will flood the world market with low-cost strategic products – especially those related to the ecological transition.
“China’s use of industrial policies to support priority sectors may lead to misallocation of domestic resources and potentially impact trading partners. Reducing such policies and removing restrictions on trade and investment would increase domestic productivity and alleviate fragmentation pressures. In this context, China must continue its efforts to strengthen the multilateral trading system, specifically as established by the WTO,” said IMF Deputy Managing Director Gita Gopinath.
Recently, United States Treasury Secretary Yanet Yellen, during the G-7 summit in Italy, asked that her country and the European Union create “a united and clear front” against China’s industrial overcapacity. The measures taken by the Biden administration were to increase tariffs on Chinese electric vehicles, among other products, to 100%, while Brussels is carrying out an investigation to see if China’s subsidized industry generates unfair competition in the European market . Once they know the result, they will act accordingly.
GDP upward revision
In its ‘Article IV’ report, the IMF mission in the Asian country aligns with the Politburo’s growth forecasts and revises China’s GDP for this year upwards to 5%, that is, 0.4% more than in its World Economic Outlook report published in mid-April. By 2025 they expect it to slow down to 4.5%.
These new projections take into account the good GDP data that the country reflected in the first quarter and the measures recently announced by Xi Jinping’s administration. In the first three months of the year, the Chinese economy expanded 1.6%, compared to the 1% it registered between October and December 2023. At the end of last year, the accumulated growth of the world’s second economy notably surprised the market by advancing 5.2%.
The IMF assures in its document that the “immediate” priorities that Chinese officials in charge of the Economy should have are to “carry out wide-ranging structural reforms” and highlight as “key” the need to rebalance the economy “towards consumption”, strengthening the social safety net and liberalizing the service sector.
Gopinath assured that China’s economic development “has been notable” in recent decades, but during this time of development “imbalances and growing vulnerabilities” have emerged, accompanied by obstacles to growth.
In fact, they predict that the economy will continue to slow down until reaching 3.3% growth by 2029 due to “the aging of the population and lower productivity growth.”
Two of the main obstacles facing the Chinese economy are the low domestic demand and the enormous crisis that is shaking its real estate sector. According to the IMF, inflation is expected to increase “but will remain low, as production remains below potential.” At the same time, they see underlying inflation, which excludes energy and food as they are materials with more volatile prices, gradually growing until reaching an average of 1% in 2024. In the month of April, the general CPI closed at 0 .3%.
These inflation data allow us to get an idea of how withdrawn domestic consumption is in China, which expected to rebound strongly after the opening of the country in 2022, which did not happen.
Regarding the real estate sector, Beijing has made numerous reforms to encourage the purchase of new homes and incentives to complete unfinished projects. The most recent measure was the purchase, by the public sector, of part of the 60 million empty apartments in the Asian giant’s real estate stock to convert them into social and affordable housing. The objective of this is to remove empty housing from the real estate stock.
Gopinath assured that these corrective measures are “necessary” to put the sector on a sustainable path and reiterated that “they should continue.” Therefore, the leader reiterated that a more comprehensive package of measures “would facilitate an efficient and less costly transition, while protecting against downside risks” to growth.
Financial stability
We must also not forget that, in addition to the real estate sector, China faces an enormous financial problem of hidden debt of its local administrations. According to recent estimates, this amounts to 70 billion yuan (about 9 billion euros).
To address this problem, the Government has implemented a series of measures in the second half of 2023 to help these local governments exchange or restructure their large unrecorded liabilities.
Experts assure that the measures are poorly suited to the real problem it represents. the hidden debt of these administrations. They reiterate that, at most, they will “provide temporary relief” and reiterate that this is already “an imminent liquidity crisis problem for Chinese regional authorities.”
On the other hand, the IMF assures that the policies carried out by the Politburo in this field “have adequately focused” on addressing the debt of local governments and smaller financial institutions. But they recommend strengthening the bank resolution framework and “strictly applying” prudential standards that “will help improve” financial stability and help mitigate risks to the good performance of the economy.
Source: El Economista Magazine
Editor: Welcome to the Time.news interview segment, where we delve into pressing global economic issues. Today, we have the honor of speaking with Gita Gopinath, the Deputy Managing Director of the International Monetary Fund. Gita, thank you for joining us.
Gita Gopinath: Thank you for having me. It’s great to be here.
Editor: Let’s dive right in. The IMF recently completed a mission to China and provided some significant insights. One key theme is the need for China to reduce its “distorting” supply-side policies that support the manufacturing sector. Can you elaborate on why this is critical at this juncture?
Gita Gopinath: Absolutely. China’s industrial policies have been instrumental in its economic rise, but they can also lead to a misallocation of resources and create challenges for trading partners. Overcapacity in sectors supported by subsidies not only distorts global trade but can also undermine domestic productivity in the long run. By reducing these policies and opening up to trade and investment, China can enhance its own productivity and foster a more balanced economic environment.
Editor: This comes at a time when both the United States and the European Union are raising concerns over China’s subsidized industries. U.S. Treasury Secretary Janet Yellen has mentioned creating a united front against China’s industrial overcapacity. How do you see this dynamic evolving between these major economies?
Gita Gopinath: The calls for a united front signal a growing recognition of the challenges posed by unfair trade practices. The U.S. and EU have legitimate concerns about maintaining a level playing field. As countries impose tariffs – as the Biden administration has done with electric vehicles – it’s vital that China engages constructively, to address these concerns and move towards a more equitable trading system. The long-term stability of international trade is at stake.
Editor: Shifting our focus to economic growth, the IMF has revised China’s GDP growth forecast to 5% for this year. What factors contributed to this upward revision?
Gita Gopinath: The upward revision is largely driven by robust GDP data from the first quarter and the proactive measures taken by the Chinese government. The economy demonstrated a solid growth of 1.6% in those first three months, an improvement over previous quarters, driven in part by strong consumption and investment. However, our projections indicate a gradual slowdown to about 4.5% by 2025, reflecting various structural challenges including demographic shifts and lower productivity growth.
Editor: You mentioned imbalances and vulnerabilities within the Chinese economy. Could you elaborate on the main obstacles that might hinder its growth?
Gita Gopinath: Certainly. Two of the most pressing obstacles are weak domestic demand and the ongoing crisis in the real estate sector. Despite expectations for a rebound in consumption post-reopening, the recovery has been slow. Additionally, the real estate sector, plagued by substantial overhanging debt and empty apartments, needs careful management. Recent measures by Beijing to convert empty homes into affordable housing are steps in the right direction, but more comprehensive reforms are essential to ensure sustainable growth.
Editor: And what about inflation? You’ve pointed out that inflation is expected to rise, albeit remaining low. How does this reflect on the current state of consumption in China?
Gita Gopinath: The current inflation signals a conundrum. While we expect underlying inflation to gradually increase, overall consumer price inflation remains subdued, reflecting a demand that is not fully robust. The lack of strong consumption suggests that households are still cautious post-pandemic, which could further complicate the economic recovery if not addressed. Boosting consumer confidence is vital for stimulating domestic demand.
Editor: Gita, thank you for your insights. what overarching message would you like to convey to policymakers in China to help navigate these challenges?
Gita Gopinath: I would emphasize the importance of comprehensive structural reforms aimed at rebalancing the economy towards consumption. Strengthening the social safety net and liberalizing the service sector are crucial for sustainable long-term growth. China has made tremendous strides, but addressing the underlying vulnerabilities is essential for ensuring stability and prosperity in the years to come.
Editor: Thank you, Gita, for sharing your expertise with us today. Your insights are invaluable as we collectively navigate these complex economic challenges.
Gita Gopinath: Thank you for having me. It’s been a pleasure discussing these important issues.