The I.M.F. said that state controls over the economy were partly to blame for soaring property prices, excessive bank lending and mounting local government debt, and that these were among the growing risks that threatened to undermine the country’s economic boom.
The report was the latest effort by the I.M.F. to pressure Beijing to quicken the pace of its economic reforms and adopt a more market-oriented approach to banking and finance in the country, which has the world’s second-largest economy.
“The existing configuration of financial policies fosters high savings, structurally high levels of liquidity and a high risk of capital mis-allocation and asset bubbles, particularly in real estate,” the report said. “The cost of these distortions is rising over time, posing increasing macro-financial risks.”
Jonathan Fiechter, one of the authors of the I.M.F. report, said China had made remarkable progress over the last three decades, but that the country’s integration into the global economy made it more urgent for its banks to operate according to market forces.
“Take the training wheels off and let the banking system work,” Mr. Fiechter said.
Take the training wheels off? Let the banking system work?
China’s central bank responded by saying "the suggestions regarding the time frame and prioritization of some reform measures lack a thorough understanding of China’s reality.”
The Chinese government’s control over the economy has become a sore point in China’s relations with the United States and the European Union over the last few years.
Only two weeks ago, in a report to Congress, the U.S.-China Economic and Security Review Commission criticized China for pursuing “state capitalism” — policies that give big state-owned companies a competitive advantage over foreign companies doing business in China.
The Chinese Communist Party “has not expressed an interest in becoming a bastion of free market capitalism,” the Congressional report said, noting that state companies account for about 50 percent of China’s economic output. “It is pursuing socialism with Chinese characteristics, which mandates a prominent role for state ownership.”
In the I.M.F. report, China’s banking and financial system is portrayed as huge, complex and flawed, with state bank lending favoring state companies over private corporations and the financial system creating distortions that affect a wide range of factors, including interest rates, property prices and the exchange rate.
The I.M.F. said, for instance, that despite the nation’s spectacular growth, the quality of that growth had become increasingly inefficient. It now takes about $5 worth of investment to create $1 of gross domestic product — about 40 percent more than it takes in Japan or South Korea, the report said.
The IMF suggested that China "give banks more control over lending and risk management and expanding the authority of the nation’s central bank."
Ms. Christine Lagarde, Managing Director of the IMF emphasized the important role of Asia, and especially China, in achieving global economic recovery.
“The rise of Asia in the global economy is really the defining economic success story of modern times. And so today, it is no surprise that Asia is propelling the global recovery,” she said in a speech at the International Finance Forum in Beijing.
She noted in particular the achievements of China in growing by an average 10 percent a year and pulling half a billion people out of poverty over the past three decades. “No wonder that when I visit this region, I feel that I am filled with hope and optimism about the future.”
Ms. Lagarde also commented that she believed China is on the right path--as laid out in its comprehensive 12th five-year plan, in terms of reducing domestic vulnerabilities and reorienting the economy towards domestic consumption.
Ms. Lagarde also stressed the importance of IMF governance reforms in giving a greater voice to emerging markets and developing countries, noting that “One result of these governance reforms is that China is in our top three shareholders. So China is a very important member of the IMF—which is only fitting, given its very important role in the global economy.”
“China has once again taken the global central stage and plays a crucial role—today and into the future,” she said.
I do believe thou does protest (and praise) to much!