(Updates with quote from report in last paragraph.)
Nov. 11 (Bloomberg) -- Incentives that led Chinese households and companies to build up savings haven’t changed enough to reverse the trend and boost domestic demand in coming years, the International Monetary Fund staff said in a report that also calls for an appreciation of the yuan.
In a sustainability assessment prepared for the Group of 20 leaders and published today, the IMF staff said it diverges with Chinese authorities on the prospects for savings in the world’s second-largest economy. IMF economists see China’s current- account surplus, the broadest measure of trade, widening to about 8 percent of gross domestic product over the medium term, from an expected 5.2 percent this year.
“China’s growth model has been based on high domestic saving, counterbalanced by high external demand and equilibrated by a low real exchange rate,” according to the report, which was part of a broader evaluation of whether G-20 policies are consistent with one another. “As the authorities recognize, the model ultimately needs to change.”
The IMF assessment was discussed last week in Cannes, France by G-20 leaders, who in their communique vowed to “move more rapidly toward market-determined” currencies and in an appendix welcomed China’s “determination” to increase the yuan’s flexibility. IMF chief Christine Lagarde during a trip to Beijing this week said the country is willing to let the yuan appreciate.
The IMF report said the real effective exchange rate during the first eight months of the year has been about 13 percent higher than the average of the previous two decades. It has shown almost no appreciation so far this year and is “substantially below the level consistent with medium-term fundamentals,” according to the report.
Besides the exchange rate, the measures recommended in the report include strengthening social safety nets and allowing greater competition in domestic markets. While many of these policies are already in the country’s five-year plan, a “determined and sustained implementation” will be needed, according to the IMF.
In another of the reports prepared for the G-20, the IMF staff also said that major advanced economies face “elevated risk” of falling back into recession. “In the context of lower growth, adverse feedback loops between the real economy, fiscal tensions and the financial sector have strengthened, posing risks to financial stability,” according to the report.
--Editors: Vince Golle, Gail DeGeorge
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