IMF Updates Outlook on Chinese Economy Ahead of Schedule

As the global economy has slowed in recent years, the world increasingly looks to China for answers. Although China is doing considerably 1 well despite the circumstances, some say the nation will have to make some quick and strong maneuvers 2 if it wishes to retain control of its own economy.

Jonathan Alpart has more.

 

For the first time, the International Monetary 3 Fund has updated its outlook on China ahead of schedule, due to the European sovereign debt and banking 4 crisis, as well as the slow recovery of the US economy.

Murtaza Syed, deputy chief representative of the IMF in China, details the IMF's projections 5 on the Chinese economy, as well as their prescriptions 6 for China's future.

"We think China will still be the bright spot in the global economy in 2012. It will still be growing at a very, very fast rate, and contribute about a quarter to global growth. But we see domestic demand in China remaining resilient."

According to their forecasts, China is doing remarkably 7 well, but high inflation and the bubbling housing market remain lingering problems.

Syed believes he knows the best ways to remedy these issues.

"On inflation I think we are less worried than some analysts 8. We see it as having peaked. The food impulses are dissipating. The supply and demand dynamics 9 in the agricultural sector 10 are so tight that it is still very vulnerable to a food shock. On the property sector I think the propensity 11 for property bubbles remains 12, and to really address that you need to increase interest rates so that households have a better return on their savings 13 and are not forced to look elsewhere outside of the banking system in the property sector to invest."

History has repeatedly shown that financial reform is dangerous, and the past decade certainly has not provided the Chinese government with confidence in Western models. However, according to Syed, the Chinese may not have a choice if they want to maintain control over their economy in the near-future.

"The risk of not doing it is that you will risk losing monetary control. That much of the intermediation of the credit that is happening will happen outside of the banking system where you have relatively 14 less control. So there's an urgent need within the next five years to put into place financial sector reform."

The IMF's plan for China over the next five years stresses a flexible exchange rate, a solid and regulated framework, developing the financial system outside of banking, and then liberalizing interest rates and the capital account.

Doing so, they say, would lessen 15 income equality, increase China's inclusive market growth, create jobs and help protect the environment.

For CRI, I'm Jonathan Alpart.