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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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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 -5 25 26 27 28 29 2 211 212 213Q2-2 22 24 26 28 2 212 Aug-13 4
Retail Sales (In percent, year-on-year growth) Real Fixed Asset Investment (In percent, year-on-year) Total 2 6 4 SOE Non-SOE Infrastructure 5 2 Total (LHS) Consumer durables Automobiles - -5 27 28 29 2 211 212 213 Aug-13-2 27 28 29 2 211 212 213 Aug-13 5
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) 6 6 6 3 3 3-3 Exports Trade balance (USD bn) -3-3 -6 29 2 211 212 213 * Seasonally adjusted using X12 after averaging January and February data. -6 Aug-13-6 28 29 2 211 212 213 July-13 6
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Financial Sector Local Government Finances Real Estate Insufficient Domestic Rebalancing 8
Net Domestic Credit (Percent of GDP) 25 2 15 5 Net Domestic Credit and GDP per Capita (Select economies, 27-11 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 2 3 4 5 6 GDP per capita (USD, thousand) Denmark 2 175 15 125 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 22 24 26 28 2 212 * in percent of 4Q rolling sum of quarterly GDP. 2 175 15 125 213Q2 9
Ratio of EBIT to Interest Expense in Listed Chinese Companies 1 (In percent, 27-212) 12 12 8 6 4 2-2 9.6 4.8 2.5 1.4 75th percentile Median 25th percentile th percentile 5.4 2.4 1.1-1. 27 28 29 2 211 212 213Q1 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. 8 6 4 2-2 Change in the Median Ratio of EBIT to Interest Expense by Sector in Listed Chinese Companies 1 (In percentage points, 27-213Q1) Change through 213Q1 8 27 213Q1 6 4 2-2 -4-6 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. 8 6 4 2-2 -4-6
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
16 12 8 Infrastructure Investment and Financing Sources (In percent of GDP) Financed by Budget Financed by GMFs Financed by Market Financing Total local government financing 16 12 8 Augmented Deficits and Net Borrowings (In percent of GDP) Augmented net borrowing Net proceeds from land sales Augmented fiscal deficit 16 12 8 4 4 General government deficit 4 1994 1997 2 23 26 29 212 Source: IMF staff estimates. 1997 1999 21 23 25 27 29 211 Sources: CEIC, Chinabond, EUROSTAT, China Citic Press, China Trustee Association, NAO, and the Ministry of Finance, Zhang and Barnett (213). 12
6 5 4 3 2 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 1996 1998 2 22 24 26 28 2 212 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: 29 29 2 2 211 211 Staff, 212 Local government debt Central government debt Other contingent liabilities 2 4 6 8 13
16 12 Real Estate Investment (In percent of GDP) Real estate investment Residential real estate investment 22 18 Residential Housing (Dec 26 =, sa) Investment growth (%, year-on-year; RHS) Price Floor space sold 8 6 8 14 4 4 2 1996 1998 2 22 24 26 28 2 212 6 Dec-6 Dec-7 Dec-8 Dec-9 Dec- Dec-11 Dec-12 July-13 14
5 Consumption and Investment (In percent) 12 45 Household Saving Rate (In percent) Household saving rate (flow of funds) 45 4 Private consumption (percent of GDP*) 4 Urban household saving rate 1 4 3 GFCF (percent of GDP*) Consumption (contribution to growth, RHS) GCF (contribution to growth, RHS) 8 35 Rural household saving rate 1 35 2 6 3 3 4 2 25 25 1995 1997 1999 21 23 25 27 29 211 * percent of expenditure-based GDP. Sources: CEIC; and IMF staff estimates. 212 2 2 22 24 26 28 2 212 1 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
Gross fixed capital formation (percent of GDP) 5 4 3 2 Private Consumption and Investment (Industrial countries and emerging markets; average, 26 12) China (212) China (27-12 average) China (27) 3 4 5 6 7 8 9 Private consumption (percent of GDP) 16 14 12 8 6 4 2 China: GDP Growth (Contributions by sector, percentage points) Tertiary Secondary Primary GDP Growth 2 21 22 23 24 25 26 27 28 29 2 211 212 16
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. ) -4. -2.. 2. 4. 6. 8.. Sources: World Bank; national authorities and IMF staff calculations. 1 In parentheses, the latest available year and corresponding Gini coefficients. 9 8 7 6 5 4 3 2 1 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
2 15 Growth of Working-Age Population (In percent) 7 6 5 Demographic Pressures (In millions) 25-39 years of age Less than 15 and greater than 64 years of age 7 6 5 5 4 3 4 3 2 2-5 - 195 196 197 198 199 2 2 22 23 24 25 Source: IMF staff estimates. 195 196 197 198 199 2 2 22 23 24 25 Sources: UN Population Database; and IMF staff estimates. 18
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 11 9 1.2 1..8 1.2 1..8 7 5.8 7.6.6 5 6.2 2.7 5.4.4 3 4. 1 2.4 3.3-1 21-28 29-212 213-3 Source: IMF staff estimates. 3 1-1.2. 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 2..2. 19
Convergence Process of Per Capita GDP: China, Japan, Korea (PPP, relative to United States) GDP per capita relative to the United States 8 7 6 5 4 3 2 Japan (1955 1982) Korea (1961 1997) China (1979 212) 1 4 7 13 16 19 22 25 28 31 34 37 4 43 46 49 52 Number of years of expansion Source: IMF staff estimates. Baseline scenario (213-3) Rebalancing scenario 8 7 6 5 4 3 2 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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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
Provide greater role to market forces Embed strong governance in lower-level state or state-related economic institutions Boost household incomes and consumption 23
Financial sector Local government finances Structural measures 24
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
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
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
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
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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