IMF taking more upbeat view of growth in China, world

The International Monetary Fund has become more optimistic in its outlook for the world economy in the next two years, a view that includes an upward adjustment in the forecast for China's growth.

Global growth is now projected at 3.7 percent in 2014 and rising to 3.9 percent in 2015, according to the IMF World Economic Outlook report released Tuesday. The 2014 projection is up 0.1 percentage point from the IMF's last outlook in October.

IMF Chief Economist Olivier Blanchard said the recovery is strengthening, as anticipated, but the recovery is still weak and uneven. He cautioned against becoming overly excited by the raised forecast, citing the still-high unemployment rate in advanced economies such as the United States.

China's economy is expected to grow 7.5 percent in 2014 and 7.3 percent in 2015, up 0.3 and 0.2 percentage points, respectively, from the October projection. The 2013 projection is 7.7 percent.

Such figures are significantly more robust than the growth projections of 5.1 percent for 2014 and 5.4 percent for 2015 for emerging markets and developing economies as a whole.

The IMF report said many emerging markets and developing economies have started to benefit from stronger external demand in advanced economies and China.

Growth in China rebounded strongly in the second half of 2013, due largely to accelerating investment, according to the report. But the surge is expected to be temporary, partly because of policy measures aimed at slowing credit growth and raising the cost of capital, according to the report.

"In China, the recent rebound highlights that investment remains the key driver in growth dynamics," the report said. "More progress is required on rebalancing domestic demand from investment to consumption to effectively contain the risks to growth and financial stability from overinvestment," it said.

Blanchard said the IMF has long maintained that China's growth is unbalanced and unsustainable because of its very high investment-to-GDP ratio and credit-driven economy. "So the efforts of the authority to achieve a soft landing to a more sustainable and healthy growth path is welcomed by the IMF," he told reporters in a conference call arranged after a snow storm that hit the US East Coast forced the last-minute cancellation of a scheduled on-site press conference in Washington.

Blanchard warned that the main challenge faced by China is the need to contain risks in the financial sector without excessively slowing growth. He called it "a delicate balancing act."

China's very rapid growth poses a problem, he said. Much of the 2008-09 Chinese economic stimulus package was credit driven, putting excessive investment into the nation's economy.

"The issue is when the economy slows, there can be issues on the performing loans and disappointed expectations in the sense that some investment projects will not yield the return that is expected, which in return will affect the ability to repay," said Blanchard, IMF chief economist since 2008, on leave from the Massachusetts Institute of Technology. "So in that sense, legacy impact of the rapid growth of the past few years will be a broad concern in the financial sector."

Thomas Helbling, chief of the IMF World Economic Studies Division, said most of the measures announced by the Third Plenum will help rebalance the Chinese economy. "We support them very much," he said, referring to last November's Third Plenum of the 18th Central Committee of the Communist Party of China which rolled out a number of economic reform measures aimed at giving a bigger role to market forces.

Nicholas Borst, research associate and China program manager at the Peterson Institute for International Economics, agreed that China's economy will continue to moderate in 2014. "The government crackdown on excessive growth is likely to reduce the investment rate going forward, one of the main drivers of growth," he said.

"While this is a positive step for the long-run stability of the financial system, in the short run it could be a drag on growth," Borst said, adding that the possibility of new restrictions on the housing market also could crimp growth.

Borst said he believes the bright spot in the Chinese economy is that exports are beginning to recover and that China is unlikely to suffer much from the unwinding of the US quantitative easing program. The IMF has described financial conditions in emerging markets as tighter following the US announcement in May that it would begin to trim its bond-buying program, notwithstanding fairly resilient capital flows. After months of speculation, the Federal Reserve in December finally trimmed its monthly purchase of Treasuries and mortgage-backed securities to $75 billion, down from $85 billion.

Blanchard said China is different from other emerging markets in a number of aspects, citing the country's economic convergence, its unprecedented growth rate and its control of capital. These traits have exposed China to international market turbulence more indirectly than other emerging markets, the economist said.

chenweihua@chinadailyusa.com