IMF Begs Beijing To Prepare Stimulus

IMF Urges Beijing to Prepare Stimulus (Wall Street Journal, Feb. 7, 2012):

China should be prepared to sharply stimulate its economy if Europe’s growth falls more than anticipated, the International Monetary Fund said, adding to expectations that Beijing could turn to spending if conditions significantly worsen.

In its China economic outlook report released on Monday, the IMF urged China to run a deficit of 2% of GDP rather than looking to reduce the country’s deficit as planned, given the uncertainty in the global economy.

If Europe’s problems turned out to be worse than expected, China should hit the fiscal gas pedal harder. In that case, “China should respond with a significant fiscal package” of about 3% of GDP, the IMF said, including reductions in consumption taxes and new subsidies for consumer-goods purchases and for corporate investments in pollution-control equipment.

However, the IMF warned that Beijing should execute any fresh stimulus through its budget rather than the banking system. China used a four trillion yuan, or about $635 billion, stimulus package in 2008 to help blunt the impact of the financial crisis, in large part through bank lending. Economists now worry China’s response to new economic threats could be hobbled if a significant slowdown in growth leads to bad debt on the balance sheets of China’s major state-controlled banks.

China has room to spend. Its deficit last year came in at an unexpectedly low 1.1% of GDP, according to Wall Street Journal calculations, though the figures are subject to considerable revision. A number of economists within the government and in the private sector say spending could help reduce China’s reliance on monetary stimulus and help the government transition to a more consumer-driven economy.

As previously reported, the IMF forecast that China’s growth rate, which stood at 9.2% last year, will decelerate to 8.2% in 2012. The IMF expects the world’s No. 2 economy to gather speed next year and grow at 8.8%.

Still, China is especially vulnerable to a downturn in Europe and slow growth in the U.S., which together account for nearly half of China’s exports. A sharp decline in growth in those markets could reduce Chinese growth by four percentage points below IMF projections, the fund said, unless China were to roll out a big stimulus plan.

A stimulus plan of around 3% of GDP, spread over 2012-13, would limit the decline in anticipated growth to about one percentage point lower than the IMF forecasts.

China’s inflation has peaked and is coming down to “more comfortable levels,” which should allow the authorities to fine-tune monetary conditions and supply the economy with “modest additional” credit, the IMF said.

Specifically, the Chinese central bank should relax liquidity conditions over the next couple of months via its weekly open market operations, it said. If capital inflows remain subdued, it could also choose to further lower banks’ reserve requirement ratio, it added.

Faced with a slowing economy, the People’s Bank of China lowered its reserve requirement ratio—or the minimum amount of money commercial banks must keep in reserve at the central bank—by 0.5 percentage point in December, the first such cut since December 2008.

The IMF said China’s efforts to cool its property sector have been effective, as both price growth and transaction volumes have dropped.

Commenting on the yuan, the IMF said upward pressure on the currency has diminished recently, with the speed of foreign reserve accumulation also declining due to a smaller trade surplus and higher global risk aversion. “However, given the current account still has a sizable surplus in U.S. dollars and FDI [foreign direct investment] remains strong, the pace of reserves accumulation should resume this year,” it said.


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