Near-term growth: moderating, but no imminent hard landing. Vulnerabilities are growing along the current growth path

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2 Near-term growth: moderating, but no imminent hard landing Vulnerabilities are growing along the current growth path financial and structural reform must be accelerated to contain risks and transition to sustainable growth path 2

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4 2 China: Real GDP Growth (In percent) Staff estimates, q/qsaar 25 2 Inflation (In percent, year-on-year) PPI Headline Non-food 15 Year-on-year 15 Food 5 5 Official q/q saar Q Aug-13 4

5 Retail Sales (In percent, year-on-year growth) Real Fixed Asset Investment (In percent, year-on-year) Total SOE Non-SOE Infrastructure 5 2 Total (LHS) Consumer durables Automobiles Aug Aug-13 5

6 9 Trade Balance (In percent, 3mma, 3m-on-3m, saar*) Imports 9 9 Trade, FDI, and Foreign Exchange Intervention (In USD billion) Non-FDI capital inflows (estimated using intervention proxy) Goods trade balance FDI utilized Intervention proxy (based on bank settlement data) Exports Trade balance (USD bn) * Seasonally adjusted using X12 after averaging January and February data. -6 Aug July-13 6

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8 Financial Sector Local Government Finances Real Estate Insufficient Domestic Rebalancing 8

9 Net Domestic Credit (Percent of GDP) Net Domestic Credit and GDP per Capita (Select economies, average) Spain New Zealand Italy China Greece Vietnam Malaysia Thailand Korea, Rep. Brazil Slovenia South Africa Hungary India Chile Poland Philippines Colombia Russian Federation Paraguay Peru Japan United Kingdom Germany Netherlands Iceland Sweden United States Finland GDP per capita (USD, thousand) Denmark China: Social Financing Outstanding (In percent of GDP*) Other Non-fin enterprise equity Net corporate bond financing Bank acceptance Trust loans Entrusted loans Loan in foreign currency Loan in local currency Total * in percent of 4Q rolling sum of quarterly GDP Q2 9

10 Ratio of EBIT to Interest Expense in Listed Chinese Companies 1 (In percent, ) th percentile Median 25th percentile th percentile Q1 Sources: WIND; and IMF staff calculations. 1/ Computed for a balanced panel of 1,2 (equally weighted) nonfinancial companies with data availability for the entire sample period. EBIT = earnings before interest and taxes Change in the Median Ratio of EBIT to Interest Expense by Sector in Listed Chinese Companies 1 (In percentage points, Q1) Change through 213Q Q Materials IT Utilities Industrials Real Consumer Energy Health Estate Care Sources: WIND; and IMF staff calculations. 1/ Computed for a balanced panel of 1,2 nonfinancial companies with data availability for the entire sample period. Median computed based on equal-weighting of companies

11 New channels are progress toward more market-based finance, but pose risks to financial stability Rapid credit growth points to potential asset quality problems Maturity transformation implies liquidity risks Problems still manageable (fiscal space, capital and provisioning), but reforms more urgent 11

12 Infrastructure Investment and Financing Sources (In percent of GDP) Financed by Budget Financed by GMFs Financed by Market Financing Total local government financing Augmented Deficits and Net Borrowings (In percent of GDP) Augmented net borrowing Net proceeds from land sales Augmented fiscal deficit General government deficit Source: IMF staff estimates Sources: CEIC, Chinabond, EUROSTAT, China Citic Press, China Trustee Association, NAO, and the Ministry of Finance, Zhang and Barnett (213). 12

13 Augmented Public Debt Level (In percent of GDP) LG: bank loans LG: corporate bonds LG: trust loans LG: issued by central government CG: issued by ministry of finance Foreign est Sources: CEIC, Chinabond, EUROSTAT, China Citic Press, China Trustee Association, NAO, and the Ministry of Finance; and IMF staff estimates. Debt Estimates (In percent of GDP) Shih, 29 DRC, 2 PBoC, 2 Audit Report, 2 Roubini, 211 Market Estimates: Staff, 212 Local government debt Central government debt Other contingent liabilities

14 16 12 Real Estate Investment (In percent of GDP) Real estate investment Residential real estate investment Residential Housing (Dec 26 =, sa) Investment growth (%, year-on-year; RHS) Price Floor space sold Dec-6 Dec-7 Dec-8 Dec-9 Dec- Dec-11 Dec-12 July-13 14

15 5 Consumption and Investment (In percent) Household Saving Rate (In percent) Household saving rate (flow of funds) 45 4 Private consumption (percent of GDP*) 4 Urban household saving rate GFCF (percent of GDP*) Consumption (contribution to growth, RHS) GCF (contribution to growth, RHS) 8 35 Rural household saving rate * percent of expenditure-based GDP. Sources: CEIC; and IMF staff estimates Rural household saving rate =(net income -living expenditure )/net income, percent; urban household saving rate = (disposable income-consumption)/disposable income, percent; household survey. 2 15

16 Gross fixed capital formation (percent of GDP) Private Consumption and Investment (Industrial countries and emerging markets; average, 26 12) China (212) China (27-12 average) China (27) Private consumption (percent of GDP) China: GDP Growth (Contributions by sector, percentage points) Tertiary Secondary Primary GDP Growth

17 Asia: Change in Gini Index, Last Two Decades 1 (in Gini points, since 199) China, urban ( 28, 35.2 ) China, rural ( 28, 39.4 ) Sri Lanka ( 26, 4.3 ) Hong Kong SAR ( 211, 53.7 ) Indonesia, rural ( 211, 34. ) Indonesia, urban ( 211, 42.2 ) Lao PDR ( 28, 36.7 ) Singapore ( 2, 48. ) India, urban ( 29, 39.3 ) Japan ( 2, 28.7 ) Bangladesh ( 2, 32.1 ) Korea ( 2, 34.1 ) Philippines ( 29, 43. ) India, rural ( 29, 3. ) Malaysia ( 29, 46.2 ) Vietnam ( 28, 35.6 ) Cambodia ( 28, 37.9 ) Nepal ( 2, 32.8 ) Thailand ( 29, 4. ) Sources: World Bank; national authorities and IMF staff calculations. 1 In parentheses, the latest available year and corresponding Gini coefficients Environmental and Natural Resource Degradation and Depletion (In percent of GNI) China India Brazil United States Source: World Bank and DRC China 23 report. Korea, Rep. of Japan Germany 17

18 2 15 Growth of Working-Age Population (In percent) Demographic Pressures (In millions) years of age Less than 15 and greater than 64 years of age Source: IMF staff estimates Sources: UN Population Database; and IMF staff estimates. 18

19 China: Contribution to Growth by Input (In percentage points) China Reform Payoffs: Potential Increase in Average TFP Growth 1 (In percentage points) 11 9 Human capital Physical capital accumulation TFP GDP growth Source: IMF staff estimates Service Sector Contestability Hukou Reform Source: IMF staff estimates. 1 Reforms envisage moving the national average of service sector employment share, contestability, and nonagricultural hukou share of population to the level of Shanghai in

20 Convergence Process of Per Capita GDP: China, Japan, Korea (PPP, relative to United States) GDP per capita relative to the United States Japan ( ) Korea ( ) China ( ) Number of years of expansion Source: IMF staff estimates. Baseline scenario (213-3) Rebalancing scenario Current model: relies on extensive growth factor accumulation and relocation of labor. Reform delays: vulnerabilities will increase as will the probability that China s convergence process stalls. Moving to high-income status: requires transitioning to a growth model more reliant on total factor productivity ( intensive growth). 2

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22 Accelerate transition to a more balanced and sustainable growth path while maintaining adequate domestic growth and stability in a difficult external environment Likely entails slower growth as economy adjusts: a tradeoff worth making 22

23 Provide greater role to market forces Embed strong governance in lower-level state or state-related economic institutions Boost household incomes and consumption 23

24 Financial sector Local government finances Structural measures 24

25 Contain build up of risks in financial sector, local governments, and real estate Strong launch to new round of reforms If growth slows too much: use on-budget fiscal stimulus, in a way that promotes domestic rebalancing 25

26 Liberalize interest rates; Strengthen regulation and supervisory oversight; Establish a robust and transparent framework for resolving bad debts and troubled financial institutions; Move to using interest rates as the primary tool of monetary policy; Remove widespread implicit government guarantees 26

27 Gradually unwind off-budget and quasi-fiscal activity Strengthen management, transparency, and overall governance framework of local government finances Shift tax burden from regressive social contributions to more progressive and efficient forms of taxation 27

28 More market-based exchange rate determination Open-up markets to more domestic and foreign competition Raise resource prices and taxes Increase the dividends SOEs pay to the budget Gradual opening of the capital account 28

29 Near-term outlook: growth around 7 ½ percent Vulnerabilities are growing along the current growth path Financial and structural reforms should be accelerated to contain risks and transform the growth model 29

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