IMF: China Should Benefit From More Flexible Currency

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Last updated at: (Beijing Time) Wednesday, September 04, 2002

IMF: China Should Benefit From More Flexible Currency

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The International Monetary Fund praised China for maintaining solid economic growth amid a global slowdown, but suggested faster reforms toward a more market-oriented economy could boost employment and help the country cope with the costs of transition.

In a press summary of its annual "Article IV" review of China's economy, the IMF said, "The near-term economic prospects remain favorable, with a strong domestic growth momentum and a robust external position."

Predicting real gross domestic product growth of 7.5% for 2002, the IMF praised central-bank officials for maintaining an interest-rate policy " accommodative" of growth. The group suggested rates should fall further should the economy show signs of weakening, and predicted deflationary pressures should recede during the second half of this year as domestic demand picks up and commodity prices rise.

Looking ahead, the IMF predicted, "The key challenges will be to achieve sustained rapid economic growth and maintain financial stability over the medium term, while successfully managing the social costs of the transition."

"This will require continued implementation of sound macroeconomic policies and completion of the unfinished reform agenda, including, in particular, by addressing the intertwined problems in the banking, State-Owned Enterprises ( SOEs) and fiscal sectors," the organization added.

Policymakers should look for ways to make the economy more flexible, including relaxing China's fixed exchange rate, the IMF said, contending, "A gradual move toward greater exchange-rate flexibility would facilitate China's adjustment to the major structural changes underway and its growing integration into the world economy."

IMF "directors suggested that steps to strengthen the exchange market - so that it reflects more fully and directly the supply and demand for foreign exchange in the economy - should form an integral part of the move to greater flexibility, and they encouraged the authorities to make progress in this area."

Noting that expansionary fiscal policy has supported growth, the IMF nonetheless urged the government to restrain budget deficits in the years ahead. Particular attention should be given to "the quasi-fiscal liabilities in the banking system and the likely future costs of pension reform, infrastructure and other social needs," the group said.

The IMF added that harder budget limits for loss-making state-owned enterprises could also help the budget outlook. IMF "directors endorsed the high priority that the authorities attach to reforming the State-Owned Enterprises ( SOE), noting that continued strong progress in this area will also facilitate a sustained expansion of the private sector and a successful completion of financial sector reforms," the report said.

The group went on to say that efficient asset disposal should remain the top priority of China's asset-management companies.

The IMF also praised recent labor-market reforms, but said more must be done to bring down a high jobless rate. "Unemployment and underemployment remain a pressing problem as the economy adjusts to the effects of SOE reforms and World Trade Organization accession, and further strong efforts will be needed to facilitate job growth in the private sector by improving access to capital, developing the SME-sector (small and medium-size enterprise), reducing barriers to entry, and encouraging freer movement of labor," said the IMF.

Source: Agencies

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