IMF warns of risks to China's economy

The International Monetary Fund predicted on July 20 that China will continue to drive global economic development with an estimated GDP growth rate of 9.6 percent this year.

China, however, still faces a number of risks, such as high inflation, a precarious property bubble and a decline in credit quality from an excessive amount of bank loans, according to the IMF.

The organization's executive board made these conclusions after a team of its staff members visited China between May 23 and June 9 to collect economic and financial information and hold discussions with Chinese officials, who included Vice-Premier Wang Qishan, Minister of Finance Xie Xuren and People's Bank of China Governor Zhou Xiaochuan.

During the IMF visit, staff members looked into a number of indicators, including China's macroeconomic outlook, the potential for a property price bubble burst and factors endangering the banking system, says Nigel Chalk, senior adviser of the fund's Asia and Pacific department who led the IMF's visit to China.

He spoke via phone conference before the fund released an 83-page staff report on China and a 15-page spillover report on the effect of China's growth on other countries.

According to the IMF, China has increased its impact on the global economy and holds "an important stake for the world in its stability".

Though the IMF scrutinized China's efforts to reform its financial sectors, Chalk says his team noted in the staff report that China has made progress in changing its GDP-based growth model while expanding its social safety net and introducing policies for affordable housing.

Inflation will start to "move to (a) downward trend" toward the end of the year, Chalk says.

He Jianxiong, IMF executive director for China, and Zhang Zhengxin, senior adviser to the executive director, say China's key challenges are to "balance the need for containing inflation, sustaining strong growth, and accelerating the transformation of the growth model" in a statement about the Chinese government.

"The task is complicated by the difficult external environment, which acutely constrains macroeconomic policy options and rebalancing efforts," according to their statement.

He and Zhang voiced their disagreement with IMF staff assessment that China's yuan is undervalued. "We do believe that China's currency needs to be stronger," Chalk says, adding that a stronger yuan is a precondition

to further its economic reforms, grow its service industry, increase household income and liberalize China's financial system.

The two Chinese argued that the IMF report is based on "the assumption of unchanged policies and constant exchange rate" and "ignores the trend exchange rate movement and the far-reaching legally-binding rebalancing measures that will be implemented in the medium term".