China must resist taking aggressive stimulus steps as it navigates troubled economic waters as they could add to excessive debt levels leading to an "abrupt adjustment", the International Monetary Fund said Friday. The IMF warning, contained in a policy report, comes after Chinese leaders earlier this week signalled a shift toward looser fiscal policy to help barricade the world's second-largest economy against global economic turbulence.
After more than a year of aggressively cracking down on dangerously high debt levels, China's cabinet on Monday said it would be more "active" in stimulating the economy, citing "external uncertainties". But the IMF said "a reversion to credit-driven stimulus would further increase vulnerabilities that could eventually lead to an abrupt adjustment". It urged policymakers to "stay the course" in its longer-term drive to wean China's economy off a dependence on fast growth fuelled by exports and investment, and toward higher-quality, sustainable growth with domestic demand as a key driver.
The IMF also lauded Beijing's stewardship of the economy, saying growth remained solid, all the more reason to pursue economic reform now and "fix the roof while the sun is shining". Premier Li Keqiang said on Monday that "fiscal policy should be more active", which analysts have called a clear signal that Beijing would ease up on its credit crackdown to keep economic growth steady.
The government said it also would accelerate plans to reduce taxes by more than 1.1 trillion yuan ($160 billion) and to issue 1.35 trillion yuan in local government special bonds for infrastructure projects. The apparent policy shift had been widely anticipated due to the mounting need to support growth in the face of fears that the trade war with the US could wreak havoc on China.
The IMF, however, expressed confidence that China could balance the competing imperatives and reiterated a 2018 full-year economic growth forecast of 6.6 percent, down from the 6.9 percent recorded in 2017.
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