Recent Chinese economic data is stoking fear the world’s second largest economy is decelerating at pace that could pull the global economy into a recession. But the International Monetary Fund’s top Asia economist, Changyong Rhee, says such pessimism may be unwarranted.
A booming services sector—such as shipping and retail—is offsetting the collapse in manufacturing, he argues. Advertisement “We don’t think there’s enough evidence based on the manufacturing sector that there will be a hard landing,” Mr. Rhee said in an interview. “They definitely have a manufacturing slowdown, an overcapacity problem. But other parts of China are actually growing faster.” If Beijing relies too much on monetary policy to stimulate growth, it could fuel China’s economic problems rather than fix them, the IMF official cautioned. His warning came as the People’s Bank of China on Friday cut interest rates again in a bid to revive growth.
Old ways of measuring China’s economy—such as looking at electricity consumption—are outdated because they don’t accurately reflect the changing nature of growth, Mr. Rhee said. Services now account for more than 50% of the country’s economy and there is a good chance their contributions are being underestimated, he said. On first glance, China’s trade data appears to support worries about the economy. But digging a little deeper into the numbers may actually show the country’s move towards a growth model more reliant on consumer demand is already bearing fruit.
Although the value of imports has fallen, volumes tell a different story. By adjusting for the fall in commodity prices and the appreciation in the yuan, the IMF calculates imports actually grew in July by 2%. And while the amount of goods imported has declined, imports of services are in double digits.
China’s real-estate sector has also fomented concerns. But Mr. Rhee said there are signs property prices are stabilizing. That is not to say the IMF believes there is no cause for apprehension. Beijing fueled its stellar growth rate over the last two decades through cheap credit. Souring global growth prospects revealed a country vastly overinvested in manufacturing capacity, particularly by state-owned enterprises. The IMF estimates overinvestment totals nearly 25% of the country’s growth domestic product. That means government-owned firms will struggle to pay their loans on mountains of credit. “If they mismanage the financial market, then they could have a hard landing,” Mr. Rhee said.
Beijing is facing a daunting task. Winding down the amount of credit in the system too quickly could stall growth. But failure to cut corporate debt levels and deal with bad loans quickly could create a bigger credit crisis over the next couple of years. “One question is whether China can manage this transition with the current governance system,” the senior IMF official said. “That is a critical issue.” Beijing will need to ensure government agencies take greater responsibility for their respective areas of oversight and state-owned companies will need to have stronger budget constraints, he said. China’s recent market turmoil revealed a weak regulatory structure. And overhauling a political system that relied on state-owned firms to boost growth and enrich regions is also expected to be a challenge.
That’s why, even though the IMF is backing more stimulus by Beijing to prevent too much deceleration in the economy, fund officials are concerned the government may depend too much on the old system of juicing the economy through credit. Counting on monetary policy, rather than using the budget to stimulate the economy, could exacerbate the problem of overcapacity.
“If they rely on monetary policy too much, then they would continue the classic credit expansion,” Mr. Rhee said. Besides fueling bad investments by state-owned enterprises, it could also “drag on necessary structural and governance reforms.”
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