Article IV, or What's Wrong With China by the IMF

♠ Posted by Emmanuel at 5/22/2012 09:08:00 AM
I am rather tardy on this but it's nonetheless a bit of international political-economic history. It is not exactly a mystery that China's leadership is rather thin-skinned to public criticism. From do I put this...vast censorship apparatus to its tin ear for economic advice, let's just say there are other countries more willing to entertain alternate viewpoints.

And so it has been with the IMF and China. In theory, the IMF should conduct yearly consultations with China as a major developing country on its conduct of economic policy. However, given its growing clout and refusal to listen, Article IV consultations were skipped altogether in both 2007 and 2008. A slight improvement was made in 2009 insofar as surveillance was conducted but China did not authorize public release of the resulting report.

However, I guess China felt the heat in 2010 and finally decided to both be subject to Article IV and release the subsequent report. Nevertheless, China had excised (exorcised?) a footnote estimating the degree of the yuan's undervaluation (which is in a way understandable since China-bashing American lawmakers could have pounced and demanded immediate revaluation). Last year too they did the same and this year too most likely. For your reading pleasure in the meantime, let me present to you the key points from the 2011 report. You'd wish China moved faster on rebalancing its economy away from (over)investment and exports and more towards domestic consumption, but it's still clearly an ongoing process:


Focus. The consultation examined the macroeconomic outlook, the potential for a property price bubble, the risks to the banking system, and the policy measures underpinning the 12th Five-Year Plan. The mission drew on the work of the FSAP—to connect financial sector reform to macroeconomic rebalancing—and of the spillover team—to trace out the international implications of rebalancing in China.

Macroeconomic Policies. The ongoing withdrawal of monetary stimulus is fully appropriate but a greater weight should be given to the use of higher interest rates and nominal appreciation in tightening monetary conditions. A continued steady decline in the fiscal deficit is also warranted, accompanied by a reorienting of tax and expenditure policies to support consumption.

Risks. The main near-term domestic risks to the outlook are from higher-than-expected inflation (most likely from domestic food supply shocks), a property bubble that inflates and then bursts, or a decline in credit quality linked to the post-crisis expansion in lending.

Rebalancing. There has been much progress on a number of fronts and the 12th Five-Year Plan lays out a comprehensive strategy to advance the transformation of China’s growth model. To achieve these goals, a range of measures will be needed including improvements in the social safety net, policies to raise household income, a liberalization of the financial system, a stronger currency, and increases in the costs of various factors of production. A successful rebalancing, with policy changes on all these fronts, will generate positive spillovers to the global economy.

Financial Liberalization. Financial reform holds significant promise in contributing to the needed transformation of the Chinese economy. Over the horizon of the 12th Five-Year Plan, reforms should seek to secure a more modern framework for monetary management, improve supervision and regulation, deepen the channels for financial intermediation, transition to market-determined deposit and loan rates, and open the capital account. In all of this, a stronger renminbi will be an important complement.