In remarks that projected confidence about the near-term health of
the world's second-biggest economy, the IMF said Beijing must keep
its word on implementing reforms that will correct imbalances,
including a "moderately undervalued" yuan.
Specifically, the fund said conditions are right for China to take
the next step in freeing its interest rates market, challenging the
view among some senior Chinese officials that the country is not yet
ready for such a move.
"We are not counseling stimulus at this point," IMF's First Deputy
Managing Director David Lipton told reporters in Beijing, when asked
if he thought China's government should do more to shore up flagging
"We don't think there are sufficient signs that would warrant that."
Rather, he said the bigger threat to China is its persistent
reliance on debt and investment in areas such as real estate to
power its economy, weaknesses that are growing and which will hurt
it in the long run if they are not corrected.
So unless China's economy is at risk of missing the government's
growth target of about 7.5 percent this year by a substantial
margin, Lipton said more stimulus is unwarranted.
"Vulnerabilities have risen to the point that containing them should
be a priority," he said, noting that the IMF believes China can hit
its economic growth target for 2014.
For next year, the fund lowered its economic growth projection from
April's 7.3 percent to around 7 percent -- a level that Lipton said
is realistic if China were to carry out extensive financial reforms,
as it promised to.
Beijing has announced a series of modest stimulus measures in recent
months after the economy got off to a weak start this year. Business
surveys in the last week signal activity may be starting to
stabilize but a slight pick-up in parts of the economy does not mean
a solid, broader recovery is under way.
The economy's lackluster performance has stirred speculation that
the government may act more forcefully to shore up activity, even
though Beijing has ruled out any big policy moves to counter
short-term dips in growth.
MODEST DEBT, BUT RISING
China has vowed to embrace comprehensive reforms that are likely
stifle activity in the near term, in order to re-orient its economy
and let domestic consumption replace exports and investment as the
mainstay sources of growth.
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Experts say the painful transition is necessary if China wishes to
break into the ranks of high-income economies.
Of the needed changes, the IMF highlighted tax and fiscal reforms,
an insurance for deposits and a removal of state control over
It said authorities must also increase their tolerance of corporate
defaults and bankruptcies, and intervene less in the currency market
to interfere with the value of the yuan.
"Conditions are right for the next step in deposit rate
liberalization," Lipton said, adding that some limited insurance for
deposits should be established as soon as possible.
China restricts how much banks pay savers for their deposits in part
to protect bank profits, a move analysts say distorts economic
reality and encourages wasteful investment by artificially lowering
the cost of credit.
But Yi Gang, a deputy governor at China's central bank, was quoted
by the Chinese media as saying in April that China is not ready to
allow markets to determine interest rates.
He said this is because local governments can use their political
power to force banks to lend to them regardless of the level of
interest rates. Furthermore, a free rates environment would
inevitably lift borrowing costs, increasing the burden on firms at a
time when China's economy is already struggling.
(Reporting by Koh Gui Qing; Editing by Kim Coghill and Simon
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