Interpretation on IMF's Staff Report for the 2022 Article IV...
Title:Interpretation on IMF's Staff Report for the 2022 Article IV Consultation with China
Under Article IV of the IMF's Articles of Agreement (hereinafter referred to as the Agreement)，the IMF's consultation with China took place in November 2022，which assessed the country's economic and financial policies in 2022. The IMF reports that China's economy has recovered impressively from the early effects of the pandemic，but growth has slowed as a result of COVID-19 outbreaks that kept occurring，the real estate crisis，and a decline in global demand. In addition，the IMF has put forward solutions to problems in relevant areas and raised proposals on advancing high-quality development. Looking ahead，under the guiding principles of the 20th CPC National Congress，China will continue to practice true multilateralism and actively participate in global financial governance and the reform of multilateral cooperation mechanisms. In the meantime，we will focus on domestic situations while striving to establish win-win cooperation with other economies and achieve high-quality development while fostering a new development pattern.
Background: Basic Information about IMF's Article IV Consultation
History and Main Contents of the Article IV Consultation
In July 1944，the United Nations Monetary and Financial Conference created the Bretton Woods System and signed the Agreement to reconstruct the international monetary and financial system. The meeting agreed that a new international system，later known as the IMF，should be established to ensure the effectiveness of the international monetary system and its function of assessing and supervising the macroeconomic and financial policies of member countries.
Outline of IMF's Staff Report for the 2022 Article IV Consultation with China
In recent years，the high-quality development of China's economy has provided a model for China’s path to modernization to the rest of the world. Attaching great importance to the evaluation and supervision of China's economy and finance，IMF has sent delegations to China for regular consultations since 1981.
Last November，the IMF delegation to China held online discussions on the 2022 Article IV Consultation with representatives from nearly 20 units，including relevant departments of the State Council，academia，and the private sector，who exchanged views on China's economic prospects，reform progress and challenges，and policy responses. IMF released the People's Republic of China: Staff Report for the 2022 Article IV Consultation (hereinafter referred to as the Report) on February 3，2023. Overall，in contrast to previous years，this year's Report focused on hot topics related to epidemic prevention and control，fiscal and monetary policies，the real estate crisis，structural change，climate governance，and international cooperation.
Highlights of the Report
COVID-19 response: Refining containment measures in a safe and appropriate manner
China has adjusted its COVID-19 response measures according to the actual conditions. As pointed out in the Report，the zero-COVID policy adopted by the Chinese government helped China overcome the difficulties in the early stage of the pandemic，with the death rate kept at a remarkably low level. It helped the economy quickly recover starting and allowed China to significantly increase the global supply of medical products at a crucial time for the world economy. Despite the fact that China eased its epidemic restrictions at the end of 2022，the policy shift occurred earlier than anticipated.
China lifts the remaining COVID-19 restrictions step by step. Before the full lifting of COVID-19 containment measures，the Report suggests that the pace of vaccination should be accelerated to maintain high vaccination rates and a high level of protective efficacy of vaccines. Chinese government must enhance the forward-looking communication around planned further easing on containment measures so that it will reduce the uncertainties that businesses and households face. In addition，local governments must expand their health care networks while judiciously implementing financial assistance programs. Furthermore，it is essential to swiftly expand healthcare capability and acquire the anti-viral treatments that are required.
Fiscal policy: Optimizing fiscal policy to enhance social security and facilitate rebalancing
Fiscal support for public investment is less effective than transfers to households. The Report argues that China has long relied on increased public investment to offset exogenous demand shocks，and that fiscal support for public investment is less effective at stabilizing the economy than targeted support for households.
Optimizing the fiscal framework with greater progressivity and spending multipliers helps safeguard economic recovery and promote rebalancing. Measures such as enhancing the social security system systematically by providing fiscal policy support to households and temporarily directing transfers to vulnerable households，as suggested in the Report，will reduce excessive savings rates，boost demand，and help rebalance by accelerating the transition to consumption-led demand. Reducing the basic tax exemptions will raise tax revenue，while eliminating deductions for home loan interest and home rental expenses will broaden the tax base. Besides，personal income tax reform will provide tax relief for low-income workers. It is also recommended that fiscal reform be implemented at the central level and that fiscal imbalances be addressed at the local leve.
Monetary policy: Using price-based monetary policy tools and optimizing prudent exchange rate management
China's policymakers need to give full play to the important role of price-based monetary policy tools. According to the Report，China's monetary policy framework has continued to improve，but the policymaker used less price-based monetary policy tools in the past year. The local projection method is used to compare the impact of different monetary policy instruments on business investment. It finds out that price-based monetary policy tools work better for smaller enterprises that are vulnerable to cyclical shocks，and that quantity-based policy tools are more effective in stimulating large companies to boost their operations，but may weaken the countercyclical effect of monetary policy. However，as a more effective countercyclical policy，the price-based monetary policy must play a dominant role in the management of cyclical fluctuations. The Report advises China's policymakers to maintain a loose monetary policy，use price-based monetary policy tools，strengthen anti-money laundering and anti-terrorist financing management，and work on measures to prevent the abuse of digital yuan in light of the country's low CPI and the negative output gap.
China's policymakers need to enhance the flexibility of the RMB exchange rate. As the Report points out，under the current slowdown in global economic growth and combined with the impact of interest rate spreads due to the sharp tightening of monetary policy in developed economies，the pressure on China's capital outflows and the exchange rate has increased. It is advisable to adjust the RMB exchange rate flexibly to absorb shocks and increase monetary policy effectiveness. In addition，China's foreign exchange administration department must strengthen prudential measures against the balance sheet effects caused by exchange rate movements，weaken capital flow management and strengthen economic adjustment and exchange rate flexibility based on macro-prudential management. However，foreign exchange intervention should be limited to disorderly market conditions.
Real estate market: Make all-out efforts to contain risks and maintain financial stability
The real estate sector's mounting pressure will increase financial vulnerability. According to the Report，the downturn in China's real estate sector，combined with slowing economic growth，has exacerbated the vulnerability of the non-financial sector due to high debts and increased pressure on the financial sector.
Joint efforts must be made to curb risks and resolve the property crisis. The Report points out that the Chinese government must take adequate measures to solve problems in the real estate sector，such as restructuring troubled developers and reforming the housing pre-sale system. Measures like structural reforms and transformation of the real estate industry，enhancing the social security system to reduce excessive household savings are also encouraged. It is also important to curb off-balance-sheet financing activities to resolve the debt problems of local state-owned enterprises. Meanwhile，China also needs to strengthen the prudential supervision of banks，deepen the construction of a financial vulnerability identification system，and gradually remove relief measures related to the epidemic and real estate.
Climate governance: Advancing reforms in the power sector to foster the development of climate finance
It is urgent to advance market-oriented reform in China's power sector. As the Report concludes，the electric power i