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Sept. 21 (Bloomberg) -- The International Monetary Fund cut its China growth estimates for this year and next and indicated that a stronger yuan would help to contain inflation and rebalance the economy.
Gross domestic product will grow 9.5 percent this year, less than a June estimate of 9.6 percent, the Washington-based lender said yesterday in its World Economic Outlook report, citing policy tightening and moderating external demand. The 2012 forecast was lowered to 9 percent from 9.5 percent.
China has offered a bright spot amid a deepening debt crisis in Europe and the threat of renewed recession in the U.S. At the same time, the nation needs to move more quickly to boost domestic demand as part of rebalancing the global economy for more stable and sustainable growth, the IMF said.
For the world as a whole, “the forecast is for an increase rather than a decrease in imbalances,” Olivier Blanchard, the IMF’s economic counselor, said in the report.
China needs to raise the contribution of household consumption to growth, according to yesterday’s report. Investment growth “has decelerated with the unwinding of the fiscal stimulus but it remains the principal contributor to growth.”
Strengthening the nation’s social safety net and shifting the focus of the financial sector toward household rather than corporate lending “would provide much needed support to global demand rebalancing,” it said.
Misalignment in exchange rates globally has changed little over the past six months, the IMF said in its report. The yuan “still appears substantially undervalued.”
For economies in emerging Asia, “further exchange-rate flexibility remains a key policy priority,” it said. In countries with current-account surpluses and rising foreign- exchange reserves, “a stronger exchange rate, combined with structural reforms would raise domestic purchasing power and allow external rebalancing, while also containing inflation pressure.”
The People’s Bank of China has raised interest rates five times in the past year and curbed lending by boosting banks’ reserve requirements to a record to help rein in consumer prices that jumped 6.5 percent in July from a year earlier, the most in three years. Gains eased to 6.2 percent last month.
Although inflationary pressure remains, tighter monetary policy and curbs on property lending and home purchases “have been gaining traction,” the IMF said, noting that growth in property prices and credit “have softened from recent record levels.”
Monetary policy in China could be made more transparent and effective by relying more on interest rates than quantitative measures of monetary control, the IMF said. The country needs to make more progress in financial liberalization, including the use of market-determined interest rates, it said.
This would “create incentives for financial institutions to better manage their market risks; remove the artificially low cost of capital, which favors investment over consumption; and at the same time strengthen the transmission of monetary policy,” according to the report.
--Nerys Avery. Editors: Paul Panckhurst, Cherian Thomas.
To contact Bloomberg News staff for this story: Nerys Avery in Beijing at firstname.lastname@example.org
To contact the editor responsible for this story: Paul Panckhurst at email@example.com