IMF Staff Completes 2022 Article IV Mission to the People’s Republic of China

IMF Staff Completes 2022 Article IV Mission to the People’s Republic of China

November 23, 2022

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

• Following the impressive recovery from the initial impact of the pandemic, China’s growth has slowed and remains under pressure. GDP growth is projected at 3.2 percent for 2022, improving to 4.4 percent in 2023 and 2024.
• In the near term, a recalibration of the COVID strategy, including an acceleration in vaccination and further action to end the property sector crisis would support growth.
• China, together with other countries, should continue to work on multilateral efforts to address global challenges amid the increasing threat of geoeconomic fragmentation and rising levels of debt distress.

Washington, DC:
An International Monetary Fund (IMF) team, led by Ms. Sonali Jain-Chandra,
Mission Chief for China, conducted virtual discussions on the 2022 Article
IV Consultation from November 2 to 16, 2022. The mission held constructive
discussions with senior officials from the government, the People’s Bank of
China, private sector representatives, and academics to exchange views on
economic prospects and risks, reform progress and challenges, and policy
responses. The IMF’s First Deputy Managing Director, Ms. Gita Gopinath,
also held virtual meetings with several senior policy officials and issued
the following statement at the end of the virtual visit:

“Under the zero-COVID strategy, China weathered the initial impact of the
pandemic well, allowing the economy to recover swiftly from the early-2020
lockdowns and to expand the global supply of medical goods and durable
goods significantly at a critical time for the global economy. However,
China’s growth has since slowed and remains under pressure amid recurring
COVID outbreaks, deep challenges in the property sector, and slowing global
demand.

“Although the zero-COVID strategy has become nimbler over time, the
combination of more contagious COVID variants and persistent gaps in
vaccinations have led to the need for more frequent lockdowns, weighing on
consumption and private investment, including in housing. The regulatory
tightening in the property sector, while well-intended to rein in high
leverage, has added to severe financial strains for developers, leading to
a rapid slowdown in housing sales and investment, along with a sharp
decline in local government land sale revenues.

“Against this backdrop, growth is projected at 3.2 percent for 2022,
increasing to 4.4 percent in 2023 and 2024, under the assumption that the
current zero-COVID strategy will be gradually and safely lifted in the
second half of 2023. Risks remain tilted to the downside, with the economy
facing external headwinds from a global slowdown, a further rise in energy
prices, and further tightening in global financial conditions.
Domestically, recurring COVID outbreaks and lockdowns and ongoing
challenges in the property sector remain key risks. Longer term, rising
geopolitical tensions pose risks of fragmentation through financial
decoupling pressures, and limits to trade, foreign direct investment, and
knowledge exchange around technology.

“Going forward, a further recalibration of the COVID strategy should be
well prepared and include boosting the pace of vaccinations and maintaining
it at a high level to ensure that protection is preserved.

“In 2023, following the support provided this year, fiscal policy should
protect the recovery and facilitate rebalancing. A neutral fiscal policy
stance geared towards supporting households will help rebalancing towards
consumption and more effectively bolster growth. Monetary policy should
remain accommodative and rely more on interest-rate based measures.

“The authorities have recently stepped up their response to the property
sector crisis, including by setting up a loan program to deliver unfinished
houses and allowing forbearance for troubled developer loans. Building on
these efforts, additional robust and well-funded mechanisms are needed for
completing troubled unfinished projects and protecting new presale buyers
from the risk of non-completion, while forbearance measures should be
phased out. These measures will help restore homebuyer confidence and
facilitate market-based restructuring. In the medium term, structural
reforms, including improving the pre-sales model, rebalancing, and
increasing the availability of alternative savings options, should
contribute to a gradual housing market transformation to a more sustainable
size.

“To ensure financial stability, prudential policies for the banking sector
should be strengthened to identify vulnerabilities and rebuild capital
buffers. Credit policies to businesses and households aimed at alleviating
liquidity pressures from lockdowns should be market-based, time-bound, and
targeted. Upgrading restructuring frameworks would help bolster financial
stability while facilitating deleveraging.

“To lift medium-term growth potential, amid headwinds from demographics and
fragmentation pressures, it will be key to re-accelerate market-based
structural reforms, such as ensuring competitive neutrality between private
and state-owned firms.

“China is taking positive steps toward addressing the climate crisis and
should build on these efforts to achieve its climate goals. Rebalancing
towards consumption-led growth would shift economic activity to services
and reduce the energy intensity of growth. While energy crunches from
climate change-induced weather shocks might require temporary increases in
coal usage—provisions should be made for reducing the role of coal in
energy supply. Further fostering the development of climate finance can
bring an additional boost to support a transition toward a carbon-neutral
economy.

“China, together with other countries, can play a leading role in
multilateral efforts to address global challenges amid the increasing
threat of geo-economic fragmentation and rising levels of debt distress
among several low-income countries and some emerging markets. China would
benefit not only from reaching new agreements in areas like e-commerce and
investment facilitation, but also from strengthening the rules-based
international trade system. The establishment, with China’s support, of the
G20 Common Framework to support debt resolution for low-income countries
was a welcome and important step. The priority now is to make this process
for providing relief faster and more predictable.

“We would like to thank the authorities for the constructive discussions
during this virtual Article IV mission.”