IMF deputy chief assesses China's growth, reform list

The Chinese economy is growing steadily, but there is a long list of economic and financial reforms to be completed without delay, a senior official with the International Monetary Fund (IMF) has said.

STABLE GROWTH

The Chinese economy continues to grow at a "healthy rate," and the IMF predicts that it will expand by around 7.5 percent in 2014 from the previous year, David Lipton, first deputy managing director of the Washington-based organization, said on Thursday in Beijing.

The latest growth rate projection was in line with the estimate in the IMF's flagship World Economic Outlook report released in April.

"China needs good growth," Lipton said during an exclusive interview with Xinhua, adding that China should aim for fast but sustainable growth.

Growth quality is key to the world's second-largest economy, and the market doesn't need to worry about a temporary growth slowdown in China, he said on the sidelines of the IMF's 2014 Article IV Consultation with China.

The Article IV Consultation is an annual economic and financial check-up held between the IMF and its member countries.

REFORM LIST

The Chinese authorities have done "many good things" and taken the "right kinds of steps" on economic and financial reforms including curbing the rise of shadow banking, coping with financial sector risk, slowing the spike of total social financing (TSF), and managing local government financing vehicles, according to Lipton.

The aggregate of China's TSF, a broad measure of liquidity in the economy, declined to 7.18 trillion yuan (about 1.16 trillion U.S. dollars) in the first four months of 2014, 746.4 billion yuan less than the same period last year, Chinese official figures showed.

Lipton believes Chinese local government financing vehicles must be used to fund local economic growth "in a way that ensures that resources are being used wisely and the right projects get done." He commended China's recent efforts to give local governments autonomy to issue bonds directly in a bid to better monitor local government debts.

Rapid growth of TSF and local government debts were both cited as major challenges facing China in the IMF's Article IV Consultation with China last year.

"If economic activities that might be risky are reined in and contained a little, you may see slightly slower growth, but you will have the benefit of lower probability of instability," Lipton explained.

In his view, important reforms yet to be completed in China include liberalizing the deposit interest rate, making the exchange rate more flexible, building a deposit insurance scheme, fiscal reform, rebalancing economic growth, environmental protection, and improving the economic governance and institutional base.

The process of implementing China's landmark economic reform agenda should go forward. "There is no reason to slow it. There is no reason to delay," said Lipton. He advised against letting the pace of reforms be affected by the possibility of them having a negligible effect on the growth rate.

POSITIVE DEVELOPMENT

Fortunately, the economic drag on the Chinese economy has not been so significant, and the strength of the global economy and exports has offset the slight slowdown of Chinese domestic demand, noted the senior international economist.

China's trade with the United States, the EU, Japan and the ASEAN rose 2.4 percent, 8.5 percent, 1.6 percent and 1.2 percent respectively in the first four months of 2014.

"It is unambiguously good news that the U.S. economy seems to be picking up some steam," said Lipton, former senior director for international economic affairs at the National Economic Council and National Security Council at the White House.

Europe is registering a "tentative" recovery, but some emerging market countries are seeing slower economic growth. Despite day-to-day economic data fluctuations, the U.S. economy is gathering strength that is good for the global economy due to greater demand for exports including those from China, according to Lipton.

However, he cautioned, "That doesn't come without risk. As the U.S. economy recovers, the Fed is more likely to carry on its normalization of interest rates and the monetary policy which is very accommodative. That is a process that may have ramifications for financial markets and for capital flows."

Since the onset of the financial crisis, the U.S. central bank has kept its short-term interest rate at a historically low level and rolled out three rounds of quantitative easing programs involving purchasing longer-term government debt and mortgage-backed securities to bolster lending and economic growth.

Overall, Lipton said, the combination of a recovering U.S. economy and normalization of the Fed's monetary policies is a positive development for the world. But for many countries, there will be financial market consequences as U.S. interest rates rise and as volatility returns to markets. It's a "meaningful challenge" for many emerging market countries.

"It's less of an issue directly for China, because China's capital account is not as open as other countries', and China's economy is not as vulnerable to swings of portfolio flows. But if other emerging market countries have difficulties, there may be indirect effects for China," he stressed.

Speaking at a press briefing held in Beijing on Thursday, Lipton said that China depends on the rest of the world, and China's economy affects the rest of the world.

An IMF delegation led by Markus Rodlauer, deputy director of its Asia and Pacific Department, visited Beijing, Shanghai and Shenyang from May 22 to June 5 to discuss the annual Article IV review of the Chinese economy.

"The improving global outlook should support exports during the second half of the year. This will help compensate for slowing domestic demand that, in part, reflects a welcome moderation in credit and investment growth," the IMF said in a statement released on Thursday.