Eurozone’s crisis and property bubble threaten China’s economy - IMF

A man walks past a sale poster on a street in Shanghai.(AFP Photo / Peter Parks)
China’s economic growth faces significant risks due to the worsening situation in the eurozone and the country’s reliance on investment, the International Monetary Fund warned in a report.

­China's growth may be cut by half from the current 8%, if the country’s fails to respond to the eurozone’s debt crisis, the lender said. The deteriorating situation in the currency union is denting investor confidence and could hit exports to the region hard.

“The main external risk continues to be spillovers to China from a worsening of the euro area crisis,” the fund said. “Assuming no policy response in China, growth could decline by as much as four percentage points in response to a one and three quarter percentage point slowdown in global growth.”

The IMF also lowered its forecast for China’s current account surplus to between 4% and 4.5% of GDP due to the uncertain global background. However, “China has ample room to respond forcefully, using fiscal policy as the main line of defense and with the emphasis on measures that support China's medium-term reform objectives," the IMF report admitted.

The report pointed out that implemented structural reforms brought the Chinese yuan close to its fair value after about a decade at an artificially weak level. For example, last year's report said the yuan was "substantially undervalued" against the dollar up to 23%.

Besides external risks, domestic issues such as investment and local borrowing have also caused concern for the IMF. The recent boom in theChinese property market forced the government to implement restrictions to avoid speculation and the creation of assets bubbles. But the IMF warned that decline in the real estate market could have significant implications for other industries, including construction, light industry and electricity.

The IMF has also called Beijing to "closely monitor and control the risks related to borrowing by local entities, especially local government financing vehicles" in order to keep government debt at the appropriate level.