Markus Rodlauer

IMF Asia and Pacific Department

2

Economy is slowing …but no hard-landing

reform over stimulus Outlook

Vulnerabilities are rising…though still manageable

reform to contain risk Risks

Plan is comprehensive…some progress, more needed

reform good for China and World Reform

0

2

4

6

8

10

12

14

16

-5

-3

-1

1

3

5

7

9

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Consumption

GCF

Net exports

Real GDP growth (y/y, percent, RHS)

Contribution to Growth(In percentage points)

Sources: CEIC; and IMF staff calculations.

6.6

7.1

7.6

8.1

8.6

7.8

8.8

9.8

10.8

11.8

2012 2013 2014

Real GDP and Industrial Value Added(In percent, year-on-year growth)

VAI (LHS)

Real GDP

Scenario 1:

7.2 Q3 growth

(2014M9 VAI = 9.05)

Scenario 2:

7.0 Q3 growth

(2014M9 VAI = 7.8)

Q3

Estimate over 2008Q1-2014Q2:

GDP = 3.35 + 0.46*VAI

R2 = 0.93

0

5

10

15

20

25

30

2010 2011 2012 2013 2014

Real FAI

Real retail sales

China: Real FAI and Retail Sales (In percent, year-on-year growth)

Aug-14

-50

-25

0

25

50

-50

-25

0

25

50

2005 2006 2007 2008 2009 2010 2011 2012 2013 14Q1

Beijing

Shanghai

Tianjin

Guangzhou

Shenzhen

Residential Property Price1: Deviation from Benchmark(In percent)

2

Sources:CEIC; WIND Info; Ahuja et al. (2010); and IMF staff calculations1 Secondhand residential housing price. 2 2014:Q1 price for Tianjin based on January-February average.

0

0.5

1

1.5

2

2.5

3

3.5

4

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tier I

Tier II

Tier III or IV

Total (CeIC)

Residential Building: Unsold Floor Space(In months of floor space sales, by tier)

Sources: CEIC; Housing Administration Bureau; and IMF staff estimates and calculations.

Growing signs of overvaluation Oversupply in smaller cities

6

7

GBR

BELDNK

ITA

NOR

SWE

SWE

FIN

GRC

IRL

PRT

ESP

ARG

BRA

URY

URYMYS

PHL

THA

0

10

20

30

40

50

60

70

80

-10 -8 -6 -4 -2 0 2 4

Cre

dit

-to

-GD

P rati

o c

han

ge in

fiv

e y

ears

GDP growth change

Followed by banking crisis

Credit Booms and Change in GDP Growth Rates(In percentage points)

Source: IMF staff estimates and calculations.

-5

0

5

10

15

20

25

30

35

-0.5

0

0.5

1

1.5

2

2.5

3

2011 2012 2013 2014

Nonfin. enterprise equity and other

Entrustred loans, trust loans, bank acceptance, net corporate bond financing

Bank loans

Total social financing stock growth (percent, year-on-year, RHS)

Social Financing Flow(In RMB trillion)

Aug-14

-15

-10

-5

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Consolidated general government balance

Augmented net lending/borrowing

Augmented balance

China: General Government Balance(In percent of GDP; including state-administered SOE funds and social security)

Sources: CEIC; and IMF staff estimates.

Net land sale revenues

Estimate of local

government off-budget

spending through LGFVs

-7.4

-10.1

-0.9

9

0

10

20

30

40

50

60

70

80

2003 2005 2007 2009 2011 2013 2015 2017 2019

Central government debt

Local government total liabilities

Revised augmented estimates

NAO estimates 1/

Adjusted augmented estimate

NAO audit result 2013

Fiscal Augmented Debt and NAO Audit(In percent of GDP)

Sources: NAO; and IMF staff estimates.

1/ including explicit government debt, government guaranteed debt, and the liabilities that the

government may incur obligations.

0

2

4

6

8

10

12

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Private consumption Investment Total consumption Net exports (RHS)

GDP Expenditure Components(In percent of GDP1)

1 Expenditure-based GDP.

30

32

34

36

38

40

42

44

46

48

0

2

4

6

8

10

12

14

16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

China: Investment, Credit, and Growth(In percent of GDP)

Growth (percent) ICOR 1/ Investment/GDP, right axis

1/ the ICOR ratio is a proxy of the inverse marginal product of capital. The higher the index, theless productive capital is.

0

10

20

30

40

50

1 4 7 10 13 16 19 22 25 28 31 34 37 40

Germany (1955-1994) Japan (1955-1982)

Korea (1963-2002) China (1979-2012)

Share of Investment in GDP(In percent, index beginning period=1)

* Gross Fixed Capital Formation.

10

20

30

40

50

30 40 50 60 70 80 90

Gro

ss f

ixed

cap

ital fo

rmati

on

(p

erc

en

t o

f G

DP)

Private consumption (percent of GDP)

Private Consumption and Investment(Industrial Countries and Emerging Markets; average, 2006-12)

China (2007)

China (2007-13 average)

China (2013)

Private Consumption and Investment(Industrial Countries and Emerging Markets; average, 2006-13)

-20

0

20

40

60

2007 2008 2009 2010 2011 2012 2013 2014

Real Fixed Asset Investment(In percent, year-on-year)

Aug-14

Infrastructure FAI

Total FAI

Infrastructure FAI

(contribution to total, real)

Policy buffers:

Govt. debt still low, large public sector assets

High domestic savings, low external debt

Government control, state-owned banks

Adjustment has started

Low probability of near-term crisis or sharp slowdown

13

Risk factors:

Real estate, credit & shadow banking, LGs, investment

Vulnerabilities interlinked & still growing

Continued reliance on investment and credit to support growth

Financial reforms complex, moral hazard

Without reforms, growing

medium-term risk

Third-Plenum Blueprint: More balanced, sustainable growth, address vulnerabilities

14

Financial Fiscal External Structural

Better pricing of

risks

More social

spending and less

investment

Greater exchange

rate flexibility

Competition and

hard budget

constraints

Improved access to

financing

More efficient and

progressive tax

system

Gradual capital

account

liberalization

Faster urbanization

↓

More productivity growth, consumer-based, inclusive, environment-friendly

15

Financial (tightened rules for shadow banking; capital market reform (new IPO rules, ‘guiding principles); a few cases of defaults) …deposit insurance, interest liberalization, implicit guarantees, supervision Fiscal (LG officials incentives; pilot LG bonds; new budget law) …re-order LG finances (revenues/spending,borrowing), tax reform, social security (coverage, benefits level, portability) Monetary and exchange rate (band +/- 2 percent) …new monetary policy framework, exchange rate flexibility, capital account

SOE reforms (SASAC pilots, local initiatives) …level playing field with private sector; exit of nonviable firms Household registration (‘houkou’), land reform, resource pricing …rebalance capital to household income

16

Design and implementation challenge o Complex, interlinked reforms o Central guidance, decentralized implementation o Balancing adjustment and near-term growth

Some key questions

o What can we expect on fiscal and SOE reform? o How much tolerance for lower growth? o Shape of stimulus if needed? o How to tackle moral hazard and implicit guarantees?

17

18

-0.4

-0.2

0.0

0.2

0.4

-0.4

-0.2

0.0

0.2

0.4

Arg

en

tin

a

Au

stra

lia

Bra

zil

Can

ad

a

Fra

nce

Germ

an

y

Ind

ia

Ind

on

esi

a

Italy

Jap

an

Ko

rea

Mexi

co

Ru

ssia

Sau

di A

rab

ia

So

uth

Afr

ica

Turk

ey

Un

ited

Kin

gd

om

Un

ited

Sta

tes

Oth

er

Eu

ro A

rea

Oth

er

Eu

rop

ean

Un

ion

Long-term spillover impact from fast reform implementation in China

Near-term impact from fast reform implementation in China

Average short-term adverse impact

Average gains from China's reform

Simulated Global Spillovers from China's Reform Blueprint(In percentage points)1

Source: Preliminary staff simulation results based on FSGM-G20 model.1Adjusted for a one percentage change in China's GDP growth.

19

Moderate slowdown welcome… ‘hard landing’ unlikely

reform over stimulus Outlook

Vulnerabilities rising…but still manageable

reform to contain risk Risks

Plan comprehensive…some progress, more needed

reform good for China and World Reform