IMF Welcomes Chinese Policy Decisions In Article IV Consultation

by Mary Swire, Tax-News.com, Hong Kong

24 July 2009

On July 22, 2009, the International Monetary Fund released the findings of its Article IV consultation with the People’s Republic of China.

The IMF notes that China has been hit hard by the global economic crisis, causing a slowdown in the real estate market, and an overhang caused by excess capacity in various industries. Exports have fallen dramatically and growth is now at its lowest point in more than a decade.

The government has responded with decisive monetary and fiscal policies, offsetting the drag from declining world demand and falling private investment. While the recovery has yet to be firmly established, recent data is encouraging and there are signs an economic turnaround is taking hold. Consumption indicators are relatively strong, industrial production appears to have bottomed out, and labour markets appear to be absorbing those workers laid off from export industries.

A long track record of fiscal discipline has driven down public debt, affording China the space needed to significantly expand fiscal support. Public infrastructure has been deployed quickly—including major infrastructure projects and efforts to rebuild following the Sichuan earthquake—and the tax burden has been reduced.

Strategic plans have been devised to support individual industries, retooling factories, improving energy efficiency, encouraging innovation and R&D spending, and consolidating those industries with excess capacity.

In its recommendations the IMF welcomed China’s implementation of stability-orientated economic policies, highlighting their use as a ‘bedrock of regional stability’.

With the uncertain pace and timing of the global recovery and its effect on Chinese exports, and production capacity, the IMF welcomed steps being taken by China to bolster private consumption as part of a comprehensive, well-sequenced strategy aimed at rebalancing China’s growth model, and noted that there is further room for policies to reduce China’s dependence on exports and high levels of investment.

The IMF welcomed China’s already substantial fiscal support. Given the low level of public debt, the IMF noted that there remains room for a targeted, additional stimulus aimed at increasing private consumption through near-term fiscal- measures to raise household income. The IMF concluded in recommending that fiscal support continue throughout 2010.

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