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IMF - People’s Republic of CHINA: 2010 Staff Report, July 2010

IMF - People’s Republic of CHINA: 2010 Staff Report, July 2010

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A strong fiscal response and an expansionary monetary policy have ensured that China has led the global recovery. At the same time, important progress has been made in a range of structural areas which will contribute to a rebalancing of the economy. The challenge now
will be to sustain this strong growth performance while switching decisively to an economy that is powered by the Chinese consumer.
A strong fiscal response and an expansionary monetary policy have ensured that China has led the global recovery. At the same time, important progress has been made in a range of structural areas which will contribute to a rebalancing of the economy. The challenge now
will be to sustain this strong growth performance while switching decisively to an economy that is powered by the Chinese consumer.

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Published by: FloridaHoss on Jul 29, 2010
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© 2010 International Monetary Fund
July 2010IMF Country Report No. 10/238 June 17, 2010 July 2, 2010 June 25, 2010May 19, 2010 2010 January 29, 2001
People’s Republic of China: 2010 Article IV Consultation—Staff Report; Staff Statement; Public Information
N
otice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2010 Article IV consultation with the People’sRepublic of China, the following documents have been released and are included in this package:
 
The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on July 1, 2010, with the officials of the People’s Republicof China on economic developments and policies. Based on information available at the timeof these discussions, the staff report was completed on July 9, 2010. The views expressed inthe staff report are those of the staff team and do not necessarily reflect the views of theExecutive Board of the IMF;
 
A staff statement of July 26, 2010 updating information on recent developments; and
 
A Public Information Notice (PIN) summarizing the views of the Executive Board asexpressed during its July 26, 2010 discussion of the staff report that concluded the Article IVconsultation.The policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
th
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.orgPrice: $18.00 a copy
International Monetary FundWashington, D.C.
 
 INTERNATIONAL MONETARY FUNDPEOPLE’S REPUBLIC OF CHINA
Staff Report for the 2010 Article IV Consultation
Prepared by the Staff Representatives for the 2010 Article IV Consultation withthe People’s Republic of ChinaApproved by Anoop Singh and Tamim BayoumiJuly 9, 2010
Mission
. A staff team consisting of N. Chalk (Head), A. Ahuja, S. Barnett, P. N’Diaye, N. Porter, M. Syed (APD), R. Duttagupta (SPR), I. Lee, and T. Feyzio
ğ
lu (ResidentRepresentatives) visited Beijing, Lanzhou, and Shanghai from June 17 to July 1, 2010.Messrs. He and Zhang (OED) joined the mission and Mr. Shinohara and Mr. Singh participated in the senior policy meetings. The mission overlapped with a joint MCM-WorldBank mission that began work on the Financial Sector Assessment Program for China. 
Outlook 
. The recovery has taken hold and growth should be in the double digits this year.Barring further food supply shocks, inflation will peak by mid-year and then slowly decline.The current account surplus continues to fall and is now around one-half of its 2007 peak.However, over the medium-term, there is a potential for sizable current account surpluses toreturn as the policy stimulus is wound down and the global economy recovers.
Risks
. The main risks facing the Chinese economy include a renewed weakening in theglobal recovery, a worsening of credit quality (notably from an expansion of lending to localgovernments), or a misstep in the government’s response to rising property prices.
 Rebalancing.
A range of policies will be needed to ensure a sustained rebalancing of growthtoward private consumption. These include measures to reform and liberalize the financialsystem, fiscal support for household consumption, an expansion of the social safety net, policies to capitalize on the ongoing process of urbanization, developing the service sector,structural changes to lower corporate savings, and an appreciation of the renminbi. There has been important progress in many of these areas but more remains to be done.
 Past advice
. The authorities broadly agree with the Fund’s advice on the need to rebalancetoward domestic sources of growth, but there have been different views on the appropriate pace of some reforms.
 
2Contents PageExecutive Summary ...................................................................................................................3
 
I. How has China Handled the Global Financial Crisis? ...........................................................4
 
II. Has the Crisis Response Exacerbated Existing Vulnerabilities? ..........................................9
 
A. Has the Policy Stimulus Created a Risk of Overheating? .........................................9
 
B. What are the Emerging Risks in the Property Sector? ............................................11
 
C. What are the Vulnerabilities in Local Governments’ Fiscal Positions?..................15
 
D. How has the Credit Expansion Affected the Banks? ..............................................16
 
III. Where is the Chinese Economy Heading Over a Longer Horizon? ..................................16
 
A. Will the Decline in the Current Account Surplus Endure? .....................................16
 
B. How can Recent Gains in Consumption Growth be Sustained? .............................20
 
IV. Staff Appraisal ...................................................................................................................25
 
Boxes1. Further Reform of the Renminbi Exchange Rate Regime .....................................................5
 
2. China’s Real Estate Market .................................................................................................13
 
3. Key Lessons from Recent Japanese History ........................................................................14
 
4. Prospects for the Current Account Surplus ..........................................................................17
 
5. The Inter-Provincial Impact of Exchange Rate Changes .....................................................21
 
Figures1. A Robust Recovery ................................................................................................................6
 
2. Macroeconomic Policies ........................................................................................................7
 
3. The Real Estate Market ........................................................................................................12
 
4. The Decline in the Current Account Surplus .......................................................................18
 
Tables1. Selected Economic Indicators ..............................................................................................31
 
2. Balance of Payments ............................................................................................................32
 
3. Indicators of External Vulnerability ....................................................................................33
 
4. Monetary Developments ......................................................................................................34
 
5. General Government Budgetary Operations ........................................................................35
 
6. Illustrative Medium-Term Scenario .....................................................................................36
 
7. Public Sector Debt Sustainability Framework .....................................................................37
 

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