China’s economic expansion would be cut almost in half if Europe’s debt crisis worsens, a scenario that would warrant “significant” fiscal stimulus from the nation’s government, the IMF said.
Based on the IMF’s “downside” forecast for the global economy, China’s growth could drop by as much as 4 percentage points from the fund’s current projection, which is for 8.2 percent this year, the organization said in a report released yesterday by its China office in Beijing.
The outlook expands on the IMF’s warning last month that the world could plunge into another recession if Europe’s woes deepen. Chinese Premier Wen Jiabao (溫家寶) reiterated last week his government would “fine-tune” policies to support growth amid the region’s debt crisis and the cooling domestic property market.
“China’s growth rate would drop abruptly if the euro area experiences a sharp recession,” the Washington-based IMF said. “However, a track record of fiscal discipline has given China ample room to respond to such an external shock.”
The government should cushion the impact of a deeper slowdown with measures including tax cuts that amount to about 3 percent of GDP, it said.
China’s economy is unlikely to experience a “hard landing” and the nation has room to boost fiscal spending, Anoop Singh, director of the IMF’s Asia-Pacific department, said last week in Washington. China should strengthen domestic consumption, he said.
The organization last month cut its forecast for China’s growth this year from an earlier estimate of 9 percent. It estimates expansion of 8.8 percent next year.
Singaporean Prime Minister Lee Hsien Loong (李顯龍) said China’s economy may have a “rough landing, but they will get through it,” in an interview that aired on Sunday on CNN.
China’s GDP expanded 8.9 percent in the final three months of last year from a year earlier, the least in 10 quarters, and down from a 9.1 percent gain in the third quarter. Growth may slow to 7.5 percent this quarter, Nomura Holdings Inc forecasts.
The IMF said in its report that “monetary conditions should be fine-tuned to allow for some modest additional credit to the economy,” echoing Wen’s pledges last month. At the same time, “residual concerns about credit quality and bank balance sheets from the 2009-10 stimulus would mean that any monetary response to an unfolding European crisis should be limited,” the fund said.
Chinese officials have held off a cut in lenders’ reserve requirements that banks, including Barclays Capital Asia Ltd, had forecast for last month and have also so far refrained from lowering interest rates to support growth. Wen said last month that curbs on the property market would be maintained to bring prices down to a reasonable level.
Yesterday’s report omitted providing new comments on the value of the yuan beyond saying that “upward pressures on the currency have diminished recently” and the “pace of reserves accumulation should resume this year.”
China’s foreign-exchange reserves, the world’s largest at US$3.18 trillion, fell for the first time in more than a decade in the fourth quarter of last year.
The IMF, in its annual assessment of China’s economy published in July last year, pressed for gains in the yuan, saying the currency “remains substantially below the level consistent with medium-term fundamentals.”