IMF upgrades China growth forecast again but warns more reforms are needed

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China's Per Capita GDP To Quadruple By 2020
China's economy is gradually transitioning towards a services-led economy (Source: Getty)

China’s huge economy will grow faster than previously expected but risks a hard landing if reforms are not accelerated, the International Monetary Fund (IMF) said today.

The GDP of the world’s second-largest economy will expand by 6.7 per cent this year, before slowing to 6.4 per cent on average in the following three years, the IMF said.

Chinese authorities are undertaking the massive task of redirecting the economy away from industrial-led growth and more towards the consumer-led, services-oriented model of more developed economies. The government is targeting growth of around 6.5 per cent this year, its lowest target in more than 20 years.

Read more: Moody's has downgraded China's credit rating

However, their task is complicated by the massive debt fuelling much of the recent growth, with state-owned enterprises particularly at risk.

While the growth upgrade was the second in the last two months, the IMF said China needs to do more to open state companies to market forces, including recognising losses earlier and removing the massive “implicit support” offered by government.

David Lipton, IMF first deputy managing director, welcomed the progress China has made on moving its economy towards a more sustainable model, but cautioned there was still the possibility of a hard landing unless authorities do more to rein in debt.

“China has the potential to safely sustain strong growth over the medium term,” he said. “While some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment.”

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Fears around a slowdown in the Chinese economy came to particular prominence at the start of 2016, causing stock markets around the world to sell off as investors feared financial turmoil.

Those fears proved to be unfounded in the short run, but the Bank of England nevertheless reiterated its warnings of the risk to financial stability posed by the debt pile in November.

Debt has increased rapidly since the financial crisis, particularly among non-financial corporations. Last year total non-financial sector debt breached 250 per cent of GDP, up from around 150 per cent before the financial crisis, according to the Bank of England. Total GDP has also expanded massively since that point, adding to the scale of the debt build-up.

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