Jul. 22 – The International Monetary Fund recently released a “Spillover Report” for China this month which detailed some of the major risks facing the world’s number two economy.
Spillover reports, an outcome of the G20 meetings, are intended to bolster global trade ties and economic policy. They primarily focus on how a country’s internal economic policy will affect other countries, particularly key trading partners. First and foremost, the IMF’s recent spillover report on China pointed out what many have acknowledged to be true for the last few years.
“The caricature of China as merely a cog in the global supply chain…is changing. This means China’s capacity to originate shocks has risen…” the report said.
China’s ongoing integration into the world economy has steadily increased the risk and impact of spillover, which plays a role in global stability. Many have questioned the sustainability of China’s impressive double-digit economic growth over the last decade and the IMF pointed to inflation, property bubbles and currency problems as the most pressing and threatening risks to the Chinese economy.
Global pressure to revalue the RMB has weighed heavily on China for the last few years and the IMF report carried home the point that faster appreciation of the RMB was necessary to reduce the risk and impact of spillover. Specifically, the report states that the RMB is undervalued by between 3 percent and 23 percent, depending on the way it is measured. This issue is a sensitive one for Chinese officials who are balancing a potential hard shock to Chinese exports if the RMB is revalued too quickly with international diplomatic pressure.
The report stated that in-depth and substantial change would need to take place within China’s domestic economy to have positive effects on partner nations. Key areas of transformation which the IMF stressed included reducing both household and corporate savings rates and raising factor prices.
Furthermore, the overheating of the Chinese economy and ongoing inflation are of concern for IMF officials.
“While maintenance of Chinese growth has been a big plus for partners through the global crisis, concerns were expressed about the tail risk of disruption. The concern is that overheating in China could put added pressure on commodity prices and draw short-term capital to the region,” the report stated.
It is worth noting that while Chinese authorities welcomed the analysis, they also disagreed with a number of the report’s conclusions, finding them to be overstated.
At the end of the day, the major concern is that mismanagement of China’s economy through the next few years could risk “a hard landing that reverberates beyond China.”
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