IMF urges China to increase domestic spending

18 Aug 17

China is set to grow more strongly but should take action to increase domestic spending, the International Monetary Fund has said.

The executive board’s latest assessment of the country revised up China’s growth outlook, expecting it this year to average 6.4%, compared to 6.0% last year.

It said though that this was against a backdrop of higher household, corporate and government debt, which would reach almost 300% of GDP by 2022, against 242% in 2016.

“This raises concerns for a possible sharp decline in growth in the medium term,” the IMF warned.

For China to grow strongly but sustainably the country had to increase consumption, as its savings rate stood at 46% of GDP, 26 percentage points higher than the global average.

This was largely due to the household sector where consumption was correspondingly low, which “reduces the current welfare of Chinese citizens, fosters high levels of investment which are unlikely to be absorbed efficiently, and, were investment to fall, would lead to even larger current account surpluses, worsening global imbalances”.

Social spending was increasing but more should be done in particular on health and pensions, the IMF urged.

It said this would both increase government consumption, and raise private consumption by reducing households’ need to save to meet these costs for themselves.

China has among the world’s highest rate of income inequality, and the IMF proposed that a more progressive tax system could be used finance higher social spending.

Productivity should be increased by making better use of resources at present wasted on loss-making ‘zombie’ companies, industries with overcapacity and state-owned enterprises, measures the IMF said could increase the contribution of productivity to growth by about one percentage point over the long term.

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