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IMF lowers global growth outlook, pointing to China’s rocky economic shift

The International Monetary Fund revised down its global economic growth for this year and the next, flagging increasing spillovers from China’s ongoing economic restructuring.

It knocked 0.1 percentage point off its forecast for this year, taking the figure to 3.1 per cent, and made a similar revision for the 2017 outlook, taking the number to 3.4 per cent, in its latest world economic outlook report.

The IMF estimated that China’s push to switch its economic engine away from investment and towards consumption and services would drag its growth down to 6.6 per cent this year and 6.2 per cent in 2017 – which is lower than a number of analysts’ predictions.

“We are a little bit cautious because we think the restructuring in China has barely begun,” said Frederic Neumann, co-head of Asian Economic Research at HSBC. “We would expect the Chinese economy to slow down next year, and that could put headwinds for emerging markets going into 2017.”

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Neumann said the Chinese government’s recent steps to reign in property prices in many first-tier and second-tier cities could put a brake on national growth.

The IMF expects growth in emerging markets and developing economies to increase slightly, to 4.2 per cent this year, after five consecutive years of decline. While some countries would probably perform well, the outlook for others was less rosy.

Advanced economies are expected to record 1.6 per cent growth this year, down from last year’s 2.1 per cent. The United States has seen weaker-than-expected growth in the first half of the year, while Britain’s vote to leave the European Union continues to cast uncertainties over its economy. The IMF predicted the country’s growth would slow to 1.8 per cent this year and fall to 1.1 per cent next year.

The report said that if China wanted its economic rebalancing to go smoothly, it needed to accept a slowdown and clearly communicate its policy intentions.

“Accepting lower growth entails keeping credit growth in check by tackling its root causes – notably, the pursuit of unsustainably high growth targets – and it can produce higher and better-quality growth in the long term,” the report said.

But Beijing’s current measures to boost growth in the short term created risks of disruption as its economy was still highly leveraged with a “lack of decisive progress in addressing corporate debt and governance concerns in state-owned enterprises”.

China’s debt-to GDP ratio, which has increased to 270 per cent from 150 per cent in 2008, is “increasing at a dangerous pace,” the IMF warned. This figure refers to both government and non-government obligations, but the institution warned that debt held by private companies was the greater risk, with the level now exceeding 150 per cent.

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Such dependence “reflects a combination of factors – the pursuit of unsustainably high growth targets, efforts to prop up unviable state-owned enterprises to preserve employment and defer loss recognition, and opportunistic lending by financial intermediaries in the belief that all debt is implicitly guaranteed by the government,” the report said.

A bumpy transition for China could worsen the global economic spillover, mainly in the form of trade. Growth in China’s exports and imports has generally slowed this year, but the overall volume is large enough to create plenty of trade friction with other countries.

Over the first eight months of the year, 20 countries and regions have launched 85 investigations into China’s exports with a total value of US$10.3 billion, jumping 94 per cent from a year earlier, according to the Ministry of Commerce.