Wednesday, July 28, 2010

IMF praises China's economic policy

The International Monetary Fund has released a publication outlining its assessment on the 2010 Article IV Consultation with China. While acknowledging that China was hit hard by the global financial crisis, the IMF says that "the authorities' quick, determined, and effective policy response has helped mitigate the impact on the economy and ensured that China has led the global recovery."

This was brought about by a number of initiatives the IMF says. Amongst these were an increase in public infrastructure spending, a decrease in taxes and the putting in place of incentives to boost purchases of consumer durables. In addition pensions, social transfers, healthcare and education spending were all raised. At the same time, interest rates and reserve requirements were lowered and limits on credit growth were removed, leading to an extraordinary surge in bank lending, the IMF says.

Such policies were instrumental in arresting the downward momentum to both activity and confidence, the IMF claims. Growth began to pick up in the second quarter of 2009 and reached an average for the year of 9.1%. Inflation moved into negative territory for much of 2009 but has since registered a modest increase, the bulk of which has been directly attributable to higher food prices.

In the 12 months to May, the nominal effective exchange rate has depreciated by 1.25% while the real effective exchange rate has depreciated by 0.1%. China's recovery had significant positive spillovers to the region and the global economy, the IMF says. This it achieved through increased demand for commodities, contributing to an upswing in global commodity prices, and later through higher imports of capital goods. The balance of payments saw a dramatic shift with the current account falling quickly as exports slowed and imports surged. Despite the lower current account, reserve accumulation has continued to be rapid.

With the recovery becoming increasingly well established, the government has begun to unwind some of its crisis response measures. Credit growth has been slowed, reserve requirements were modestly increased, and prudential requirements related to property lending were tightened. Growth is expected to continue to be robust, while the inflation outlook appears benign, the IMF states in the report which was released at 0:30 GMT today.
As to whether China will maintain a stable economy as other nations continue to flounder or lift themselves slowly out of recession remains to be seen. The International Monetary Fund's review of China's economic policies has been long-delayed. And while it offers much praise for the country's stimulus policies which it says boosted the global economy during a global downturn, it is thought the IMF believes China's currency remains "undervalued" [WSJ].

However the report which was released Wednesday was toned down, though several reports suggest many directors in fact hold the opinion expressed in last year's report [Reuters].

China is resilient to allow its currency to float more freely, but it has made some moves which were praised earlier this week by US Treasury Secretary Timothy Geithner. But he again put pressure on Beijing to let its currency rise quicker and farther [Economic Times].

tvnewswatch, London, UK

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