International Monetary Fund (IMF) Managing Director Kristalina Georgieva has revealed that the IMF is set to deliver a strong message to China concerning the need to boost domestic consumption, tackle issues in the real estate sector, and address local government debt. These challenges, she emphasizes, have been acting as drags on both China's and global economic growth.
Georgieva disclosed that these messages will be formally conveyed to Chinese authorities during the upcoming IMF "Article IV" review of China's economic policies. The primary focus of the IMF's recommendations will be to encourage Beijing to steer its growth model away from debt-driven infrastructure investment and real estate.
"Our advice to China is to use your policy space in a way that helps you shift your growth model towards more domestic consumption," stated Georgieva.
She stressed that the traditional approach of investing in infrastructure and injecting more funds, given the current global economic conditions, might not yield the desired results.
China faces several challenges, including an aging population, declining productivity, and the redirection of supply chains away from China by companies in the United States and Europe. These factors have contributed to a slowdown in Chinese growth. Furthermore, problems in the real estate sector have led to reduced consumer spending, making it crucial for China to address these issues promptly.
"We actually project that without structural reforms, medium-term growth in China can fall below 4%," Georgieva warned.
According to the IMF's July forecast, China's growth rate for 2023 was estimated at 5.2% and 4.5% for 2024. However, Georgieva cautioned that these numbers might need to be revised downward due to the ongoing contraction in the real estate sector.
Georgieva also emphasized the importance of China rebuilding consumer confidence in its real estate sector. She suggested that China should prioritize financing the completion of apartments that buyers have already paid for, rather than bailing out troubled developers.
The IMF is currently preparing to release a new set of global growth forecasts ahead of the annual IMF and World Bank meetings scheduled for October 9-15. Georgieva mentioned that the institutions would decide on whether to proceed with these meetings in earthquake-hit Morocco on September 18.
The forthcoming global growth forecasts are anticipated to reflect concerns about the sluggish GDP growth observed in most major economies, which have not yet fully recovered to pre-pandemic levels. The United States is the only large economy that has regained pre-pandemic growth, while China remains four percentage points below pre-pandemic trends. Europe is down by two percentage points, and the global economy as a whole has fallen by three percentage points.
Georgieva underscored the significance of China's growth rate, as it plays a pivotal role in driving global growth, responsible for about a third of global growth this year.
Regarding recent comments by U.S. Commerce Secretary Gina Raimondo about some U.S. firms viewing China as "uninvestible," Georgieva acknowledged that there is an outflow of investment from China. She stressed the importance of closely monitoring this trend as it evolves over time. However, she also noted that there are still attractive investment opportunities in areas such as the digital economy and green technologies.
Georgieva further cautioned against China's overreliance on subsidies in its push for electric vehicles, emphasizing the need to ensure fair competition in this sector. The IMF's message to China underscores the importance of addressing domestic economic challenges to sustain both Chinese and global economic growth.
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