Fund (IMF) said on Wednesday China’s economy was on course to grow 7.75% this year — higher than the government’s own 7.5% target and actual growth of 7.6% in the first half of the year.
Prospects for the world’s second-largest economy were “clouded by mounting domestic vulnerabilities in the financial, fiscal and real estate sectors”, the IMF said.
But the IMF still expected it to grow at “around 7.75% this year, notwithstanding a moderate slowdown during the first half, with resilient domestic demand offsetting lingering weakness in the external environment”. The optimism comes after economists expressed alarm following slowing growth in the past two quarters, with some doubting the government can achieve its target.
The National Bureau of Statistics announced on Monday that China’s gross domestic product (GDP) grew 7.5% year on year in the April-June period. That represented a deceleration from the first quarter’s 7.7%, which in turn was worse than 7.9% in the final three months of last year.
China, a key engine of global growth, grew 7.8% last year, its worst performance since 1999.
The IMF’s latest assessment of 7.75% growth was unchanged from late May when it downgraded its outlook from the previous 8%. The institution also sees Chinese growth barely changing next year, at 7.7%.
The IMF “welcomed China’s continued strong economic growth with subdued inflation” but urged it to “contain risks to financial stability by reining in credit growth and nontraditional forms of lending”.
A cash crunch roiled Chinese financial markets late last month before the People’s Bank of China, which had ordered banks to strengthen liquidity management, moved to calm nerves with an offer of support.
The turmoil, though brief, highlighted mounting concerns over excessive lending by banks and other problems in China’s financial system, including opaque forms of lending, often called “shadow finance”.
The IMF warned of continuing “external risks” for China in the form of “potential spillovers from developments in the euro area and major advanced economies”.
China’s yuan “remains moderately undervalued”, the fund said, adding that a “more market-based exchange rate system would facilitate further internal and external rebalancing”.
Beijing has faced pressure from the US, the European Union and others for the yuan to appreciate amid claims its value is artificially low. The currency has gained about 35% against the dollar over the past eight years.
The fund also welcomed China’s goal of refocusing its economic model to one based more on consumption. Such a “reform strategy … charts a path towards mitigating risks, rebalancing growth, and addressing income disparities.”