China OutlookEconomic Developments and Prospects
Markus Rodlauer, October 2016 1
Overview
2
The Broader Picture – Rebalancing and Reforms?
Key Issues
Size and Quality of Credit Growth
Increasing Complexity of Financial System
Frequency of Asset Bubbles
Recent Capital Outflows
Exchange Rate
Outlook
Policy Advice
The Goal: A New Structure and Quality of Growth
3
External Internal
Environment Income Distribution
Rebalancing
Scorecard
▪ Current account
▪ Net exports contribution
▪ Cons./Investment
▪ Industry/Services
▪ Credit
▪ Energy
▪ Air pollution
▪ Labor income ratio
▪ Income inequality
Rebalancing is Underway but Causing Uneven and Slower Growth
4
0
5
10
15
20
25
10Q1 11Q3 13Q1 14Q3 16Q1
Two-speed Economy(In percent, year-on-year growth)
Nominal growth of
industrial sector
Nominal growth of
services sector
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
Nominal GDP growth
16Q2
Slowdown has Prompted a Return to Higher Stimulus
5
• Traditional stimulus – from mid-2015
• Uneven reform progress – SOEs, corporate debt, opening up
• Policy uncertainty – reform/growth? market/state?
-3
5
13
21
29
-3
5
13
21
29
2013 2014 2015 2016
Real Fixed Asset Investment Growth 1/(In percent, year-on-year)
July-16
1/ Deflated by FAI prices; authorities publish quarterly index and staff estimates monthly index.
Non-SOE
SOE
Total
100
130
160
190
220
0
10
20
30
40
2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1
Credit (Adjusted for LG
debt swap)
Nominal GDP
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
1/ Total social financing stock.
Credit: High and Rising 1/(In percent, year-on-year growth)
Credit to GDP ratio
(Unadjusted, RHS)
Credit to GDP ratio
(Adjusted, RHS)
2016Q2
Three Main Concerns. First, High Corporate Debt.
6
Argentina
Australia
Brazil
Denmark
Euro area Finland
Germany
Greece
Hungary
India
Indonesia
Ireland
Italy
Japan
Korea
Malaysia
Mexico
Netherlands
Poland
Russia
Singapore
South Africa
Spain
Sweden
Thailand Turkey
United Kingdom
United States
China 15 2/
China 15 1/
0
50
100
150
200
0 10 20 30 40 50 60 70
Cre
dit
to
no
n-f
inan
cial c
orp
ora
tes
(perc
en
t o
f G
DP)
GDP per capita (USD thousand)
Corporate Credit: High vs. Peers(Selected economies, 2014)
Sources: Bank for International Settlements (BIS); and IMF staff estimates.
1/ Calculated as total social financing minus equity and household loans.
2/ Calculated as total social financing minus equity, LGFV borrowing and household loans.
China 09 1/
China 09 2/
Second, Rapidly Growing Credit.
7
United Kingdom
BelgiumDenmark
Italy
NorwaySweden
Finland
Greece
Ireland
Portugal
Spain
Argentina
Brazil
Uruguay
UruguayMalaysia
Philippines
Thailand
0
20
40
60
80
-10 -8 -6 -4 -2 0 2 4Cre
dit
-to
-GD
P r
ati
o c
han
ge in
fiv
e y
ears
GDP growth change 1/
Followed by banking crisis 3/
Credit Booms Tend to End Badly(In percentage points)
Source: IMF staff estimates.
1/ Average growth differential between 5-year post-boom and 5-year pre-boom periods.
2/ No growth change as China's boom has not ended.
3/ Banking crisis is identified following Laeven and Valencia (2012).
China 2/
50
80
110
140
170
200
230
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 20132015
Fast Credit Growth and Wide Credit Gap 1/(In percent of GDP)
Japan
Thailand
Spain
Sources: Bank for International Settlements (BIS); and IMF staff estimates.
1/ Total credit to the private nonfinancial sector. Dotted lines represent the credit trend.
China
2015
8
0
5
10
15
20
25
30
2010 2011 2012 2013 2014 2015 E
1y, ICR < 2
1y, ICR < 1.5
1y, ICR < 1
China Listed Companies' Potentially Impaired Loans 1/(In percent of debt)
1/ Estimated impaired loans on each ICR standard as a share of total loans in
the sample. The sample is from the S&P Capital IQ database.
0
1
2
3
4
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Sources: Bank for International Settlements (BIS); World Economic Outlook (WEO) and IMF Staff
estimates.
1/ Plotted as 3-year rolling average.
Pre-crisis average
Post-crisis average
Credit Intensity Rising Further 1/(New credit per unit of additional GDP)
Third, Questions about Quality of Credit
Meanwhile, the Financial System Becomes Increasingly Complex due to Shadow Products…
9
133
123
113
89
89
67
52
52
27
10
10
24
18
40
15
0 50 100 150 200
Retail loans
LGFV loans
Policy bank loans
Other credit products
Less: Overlap
Shadow products
Corporate bonds
Corporate loans
Shadow Products in a Credit System Context, 2015(In trillion of RMB)
Note: Segments highlighted in red are high-risk, yellow indicates medium-risk, and green is
low-risk. Segments in gray are outside the scope of analaysis or assumed to be zero-risk.
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
2010 2011 2012 2013 2014 2015
Trust companies Securities companies Asset managers
Shadow Products(In billion of RMB)
Source: IMF staff estimates.
10
…and a Sharp Rise in Short-term Intra-financial Sector Lending
180
200
220
240
260
280
300
320
-20
0
20
40
07 08 09 10 11 12 13 14 15
Foreign and reserve assets Claims on government and central bank
Claims on other depository corporations Claims on other finanical institutions
Claims on nonfinanical institutions Claims on other residential sectors
Other assets Total assets
Commercial Bank Balance Sheets Expanding Rapidly(In percentage points of GDP, year-on-year growth)
Sources: Haver Analytics; and IMF staff estimates.
Total assets (stock, % of GDP, RHS)
High Savings/Capital Controls leave China
Exposed to Asset Price Volatility
11
-25
-10
5
20
35
50
65
-25
-10
5
20
35
50
65
2008 2009 2010 2011 2012 2013 2014 2015 2016
Booming Tier 1 House Prices(In percent, year-on-year growth, 3mma)
June-16
Tier I
Tier II
NBS: Floor space selling price
Tier III or IV
Sources: Fangguanju; and IMF staff estimates.
…although the Capital Account has Proven more
Porous than Expected
12
-250
-150
-50
50
150
2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 2016Q2
Non-reserve flows Errors and Omissions
Financial Acount and Errors and Omissions(In billion of US dollars)
Progress Toward more Flexible Exchange Rate
Regime Will Help
13
6
6.2
6.4
6.6
6.880
90
100
110
Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16
RMB Exchange Rates vs. the US Dollar and CFETS Index
RMB/USD daily central parity fixing (RHS)
CFETS Index (Dec 31, 2014)
Oct-16
Outlook—Upside Risk to Near-term Growth…
14
47.5
48.0
48.5
49.0
49.5
49
49.5
50
50.5
51
51.5
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
PMI: Manufacturing(SA, 50+=Expansion, 3MMA)
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
PMI: Manufaturing
Employment (RHS)
PMI: Manufaturing
Aug-16
-7
-6
-5
-4
-3
-2
-1
0
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Producer Prices Index(In percent, year-on-year growth)
Aug-16
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
-10
-5
0
5
10
15
20
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Real Exports(In percent, year-on-year growth, 3MMA)
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
Aug-16-5
0
5
10
15
20
25
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Real Estate Investment(In percent, year-on-year growth, 3MMA)
Aug-16
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
… but Increasingly Weak Medium-term Without
Reform
15
2
3
4
5
6
7
8
2012 2015 2018 2021
GDP Growth: Illustrative Scenarios(In percent, year-on-year growth)
Sources: CEIC Data Company Ltd.; and IMF staff estimates.
Projection range
ProactiveNo-reform
Baseline
140
170
200
230
2014 2015 2016 2017 2018 2019 2020 2021
Credit Ratio: Illustrative Scenarios 1/(In percent of GDP)
Sources: CEIC Data Company Ltd.; World Economic Outlook (WEO) and IMF staff
estimates.
1/ Nonfinancial private debt, calculated as total social financing stock adjusted
for local governemnt debt swap minus equity financing and LGFV borrowings.
No-reform
Proactive
Baseline
Policy Advice and Key Takeaways
16
• Significant progress made on rebalancing and reform
• But lagging in critical areas: reining in rapid credit growth and SOE reform
• As a result, vulnerabilities continue rising on a dangerous trajectory
• Buffers still adequate, but eroding
• Hard landing unlikely in near term, but risks rising and timing uncertain
• Manageable, but urgent action needed to ensure they remain so
• Many reforms ongoing and planned but focused and more forceful
action needed in critical areas
THANK YOU
17
Policies – (1) Tackle Corporate Debt Problem
18
0
5000
10000
15000
20000
25000
30000
USA Germany England & Wales China
Insolvency Little Used(Number of cases, 2014)
Sources: China Court; Sinotrust; Euler Hermes; US Trust Offices; Credireform; and UK
Insolvency Service.
• High level – political – decision to let
weak firms go
• Harden budget constraints
• Triage: good, bad and the ugly
• Recognize losses
• Share the burden
• Out of court debt restructuring /
distressed debt market
• Social costs
• Facilitate market entry
Policies – (2) Accept the Slowdown
19
-20
-10
0
10
20
30
2003 2004 2005 2007 2008 2009 2011 2012 2013 2015
Tig
hte
r
Lo
ose
r
Monetary Policy Looser than Implied 1/
Policy stance index
Taylor-rule implied
policy index
Mar-2016
Source: IMF staff estimates.
1/ The monetary policy stance index is constructed on the basis of a short-term interest rate, reserve
requirement ratio, open market operations and credit growth. The implied policy index is estimated with
a simple Taylor rule that includes inflation and output developments.
-15
-10
-5
0
5
-15
-10
-5
0
5
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Proj.
Sources: CEIC Data Company Ltd.; Authorities; and IMF staff estimates.
Consolidated general
government balance
Augmented
balance
Fiscal Deficit Remains Large, But More on Budget(In percent of GDP)
• Move away from growth targets
• Slow credit growth—tackle at source
• Interest rates—eventually/gradually rise
• Fiscal—reduce augmented deficit, switch from off budget investment to on-
budget pro-rebalancing, introduce substantial carbon/coal tax
20
Policies – (3) Fiscal and External Space
43
31
65
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
China 2015 1/ EM 25th percentile EM 75th percentile
Gross Government Debt ...Not High(In percent of GDP)
Sources: World Economic Outlook (WEO); and IMF staff estimates.
1/ Including all explicit government (central and local) liabilities and part of the contingent
liabilities that the government might be responsible for.
182
75
113
94
0
40
80
120
160
200
0
40
80
120
160
200
Reserves Still Adequate(In percent of IMF Reserve Adequacy Metric)
Sources: Assessing Reserve Adequacy; IMF Policy Papers; February 14, 2011.
2016Q1 EM Average
(ex China)
2016Q1 EM Average
(ex China)
Fixed With Capital Controls Fixed Without Capital Controls
Policies – (4) Guard against Financial Risks
21
Current Regulatory Structure
State Council
CBRC CSRC CIRC
PBOC
SAFE
• Commercial
banks
•Financial asset
management
companies
•Trusts
•Other
depository FI
• Securities
• Futures
• Insurance
• Monetary
policy
• Financial
stability
• Other financial
regulations
• Foreign
exchange
management
• Cross border
payments and
capital flows
• FX reserve
• Banks: proactive recognition of losses; build
capital; improve funding quality
• Shadow products: holistic/aggressive
approach to supervision
• Capital markets: orderly functioning, not
intervention
• Property: restrict demand in Tier I; restrict
supply in lower tiers
• Crisis preparedness: prepare for potential
idiosyncratic and systemic stress
• Regulatory structure: no best practice, but
major upgrade in effectiveness needed
Policies – (5) Move to Effective Float
22
• Transition difficult but should continue—
effective float ideally by 2018
• Couple with short-term management to
avoid excessive volatility
• RMB broadly in line with fundamentals,
but should respond to market conditions
• Support with move to more market-based
monetary framework
• Caution with further capital account
liberalization
0
2
4
6
8
Jan 14 Jun 14 Nov 14 Apr 15 Sep 15 Feb 16 Jul 16
Narrowing Corridor around 7-day Repo Rate
Sources: CEIC Data Company Ltd.; and People's Bank of China.
PBC interest on excess reserves
PBC standing lending facility
PBC 7d reverse repo (OMO)
Interbank 7d repo (fixing rate)
Aug 16
Policies – (6) Enhance Transparency
23
• Data: progress made but major gaps
• Communications: clear, authoritative, consistent
What were Beijing’s Views (1)?
24
Outlook: saw 6 ½ - 7 as sustainable, infrastructure spending was needed,
quality of growth improving
External: commodity prices to recover, tourism increase, current account 2-
3% GDP in medium term, outflows to moderate
Risks:
• External: uncertainty/weak investment in some EMs; sluggish recovery
AEs; rising geopolitical tension
• Domestic: corporate debt (but manageable); financial sector (limited
and supervisors reacting)
What were Beijing’s Views (2)?
25
• Corporate debt: part of 5-year plan; progress being made; but has to be
gradual and market driven
• Macro policies: expected credit growth to slow, but will also need to be
gradual; do not recognize “augmented” deficit, fiscal to remain “proactive”
• Financial stability: disagree with debt at risk estimates; taking action on
shadow products; funding diversification natural and stable; no need for
countercyclical buffer
• FX: pressures eased, progressing to more market based system by allowing
progressively more role for market forces while curbing overshooting.
Capital account to be gradually liberalized.
• Transparency: data quality being upgraded, recognize importance of
communications but also constraints
Check out the Reports
26
• Staff Report http://www.imf.org/external/pubs/cat/longres.aspx?sk=44181.0
• Selected Issues http://www.imf.org/external/pubs/cat/longres.aspx?sk=44182.0
• Project Syndicate Op-ed by David Lipton https://www.project-
syndicate.org/commentary/china-corporate-debt-problem-by-david-lipton-
2016-08
• Video http://www.imf.org/external/mmedia/view.aspx?vid=5080114876001
• IMF Survey Interview with James Daniel
http://www.imf.org/en/News/Articles/2016/08/11/14/40/NA081216-Proactive-
Reforms-Critical-to-China-Medium-Term-Growth-Prospects