China’s near-term challenge is to contain risks to financial stability by reining in credit growth and non-traditional forms of lending, the IMF said in a report released late on Wednesday.
"[IMF] directors agreed that China has the capacity to withstand shocks, but considered that a further strengthening of policy buffers over time would be desirable," it advised in the report, which is part of the IMF’s regular country surveillance.
The most pressing priorities, it concluded, are further deregulation of interest rates, greater use of market-based instruments in monetary management, enhanced prudential oversight of bank and non-bank activity, and orderly liberalisation of the financial industry, at an appropriate pace.
The report also said that a more robust and transparent framework for resolution of bad debts and troubled financial institutions could help in an orderly exit of weak institutions.
Furthermore, it encouraged China to unwind its off-budget, “quasi-fiscal” activity gradually, although the fund recognised that supporting state-owned industries has helped to promote demand since the start of the global financial crisis. Instead, officials could “use on-budget fiscal stimulus, focused on consumption” if economic growth slows down too sharply.
On the issue of taxation, the IMF called for a more progressive and efficient system, including a value-added tax, to boost the contribution of private consumption to economic growth and reduce income inequality.
The organisation recognised in the report that the Chinese economy is on a stable growth path, despite financial risks. It predicted a GDP growth of 7.75% and an inflation rate of around 3% in 2013, higher than a range of 7.4 to 7.6% by most international banks, as well as Chinese officials’ 7.5%.
A team of IMF’s executive board wrote the report and made the estimation based on their regular bilateral discussions with Chinese officials and field trips in the country.
