China must address financial risks in a “clear and coordinated fashion” and temporarily shift its fiscal policy to a neutral stance from this year’s contractionary approach, International Monetary Fund said in a statement released on Friday.
“China’s recovery is well advanced, but is unbalanced and momentum is slowing, even as downside risks are accumulating,” the IMF said in a statement from staff involved in the recently concluded 2021 Article IV consultation with China.
The IMF blamed the slowdown to China’s rapid withdrawal of policy support, the hit to consumption from COVID-19 outbreaks, recent power outages and a slowdown in real estate investment.
“Fiscal policy, which has been significantly contractionary this year, should temporarily shift to a neutral stance and focus on strengthening social protection and promoting green investment over traditional infrastructure spending,” it said.
The IMF also called for a “comprehensive bank restructuring approach” to strengthen China’s banking system, as well as efforts to open up markets and reform state-owned enterprises.
Ongoing efforts to address high corporate leverage should be accompanied by establishing “market-based insolvency and resolution frameworks,” the IMF said.
The IMF also warned that Beijing’s tighter regulation against technology sectors has increased policy uncertainty.
China’s property sector woes have jolted financial markets and cast doubt on the growth outlook for the world’s second largest economy.
The IMF expects China’s economy to grow 8.0% this year and 5.6% next year, though the statement said downside risks to the forecasts were “accumulating.”