(CBN - Global) April 19 -- China should step up its economic reform efforts and adopt a proactive fiscal policy to support changes now that the world's second-largest economy has stabilized, according to Mr. Zhu Min, deputy managing director of the International Monetary Fund.
Mr. Zhu, whose term at the IMF will end this July, made his comments during a roundtable discussion before the close of the IMF's Spring Meetings, which were held in Washington from April 15 to 17. Mr. Zhu made a detailed analysis of how China can make full use of this valuable period of economic stabilization to push forward with its rebalancing strategy and reforms.
China's economy has slowed at the same time as the country's leadership steers it away from a growth model rooted in resource-based manufacturing, investment and exports toward one focused more on domestic-driven services and private consumption. Expansion slowed to a quarter century low of 6.9 percent last year. Measures including monetary easing, public works spending and stock market support have helped to stabilize the USD10.5 trillion economy. Gross domestic product gained 6.7 percent in the first quarter of 2016 from a year earlier, in line with expectations.
Mr. Zhu pointed out that because the stimulus package implemented by the Chinese government has been effective, and is expected to continue to spur growth, the IMF has raised its growth projections for the country. On April 12, the fund nudged up its 2016 and 2017 forecasts for China by 0.2 percentage points to 6.5 percent and 6.2 percent, respectively. Deutsche Bank also raised its estimate to 6.7 percent for this year.
Premier Li Keqiang has set out the government's targets for this year. GDP growth is targeted at between 6.5 percent and 7 percent. The consumer price index is targeted at about 3 percent, the same as for 2015, while the money supply measure M2 is targeted at about 13 percent, one percentage point higher than for 2015. Finally the deficit-to-GDP ratio is set at 3 percent, a sharp rise from last year. Proactive fiscal policy will gain momentum, while prudent monetary policy will be relaxed somewhat.
Still, Mr. Zhu suggested that the country needs to take note that its "real economic growth and growth potential have been relatively close, thus the magnitude of any stimulus cannot be too large, otherwise it will be difficult to maintain growth."
Rather than rely solely on stimulus measures to continue to spur economic growth, reforms are needed when the economy starts to stabilize and recover in order to build confidence. It is important to consider the sustainability of such growth, he said.
Timing is crucial when promoting reforms, Mr. Zhang Jun, chief economist at Morgan Stanley Huaxin Securities told CBN. Volatility in the global financial markets has toned down while the US Federal Reserve showed restraint in its rate hike.
"The country should make use of the relatively favorable economic situation to accelerate structural reforms and develop the mechanism for yuan exchange rate, so as to prepare for the future, where monetary policy can be steered more effectively for a more developed economy," Mr. Zhang said. "Otherwise, every year in the foreseeable future will be the most difficult year for China's economy."
Mr. Zhang believes that beyond minor cyclical challenges this year, the economy needs to be ready to face the '3D Challenge' (debt, demographics and disinflation) in the medium- and long-term, and its current outlook is still grim.
"Given that the Fed has entered the phase of raising interest rates, we think that it is no longer a question of if interest rate hikes are going to happen, but a question of when," Morgan Stanley's Mr. Zhang said. "Moreover, Fed Chairman Yellen recently began publicly mentioning the possibility of reducing the Fed's balance sheet, which more directly impacts global liquidity than interest rate hikes."
Among developed economies, monetary stances in the Eurozone countries and Japan are still quite relaxed, and to a certain extent this helps to hedge the potential contraction that may be brought on when the Fed hikes interest rates, Mr. Zhang said. However, once the Eurozone and Japanese economies stabilize, their monetary authorities will join the Fed in raising rates, and the negative impact on emerging markets will be significant, he said.