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Not Concerned About Hard Landing in China: IMF

Tuesday, 16 Apr 2013 | 9:13 PM ET
IMF: Bank of Japan Monetary Policy Is 'Impressive'
Jorg Decressin, Deputy Director for Research at the International Monetary Fund, tells CNBC why the body is impressed with the BOJ's policy action so far, but said their fiscal policy needs work.

Addressing mounting concerns over elevated debt levels in China, the International Monetary Fund (IMF) said it is not concerned "in any major way" about a hard landing in the world's second largest economy that has seen an unprecedented expansion in credit in recent years.

"We are not concerned at this stage in any major way about a hard landing in the Chinese economy," Jorg Decressin, deputy director of research at the IMF told CNBC on Wednesday.

"What is clear is that there has been a lot of expansion of credit lately, especially outside the banking system. This will have to be monitored very carefully and the authorities will have to take measures to rein this in," he said.

Last week, ratings agency Fitch downgraded China's long-term local currency credit rating to A-plus from AA-minus, citing risks from rapid credit expansion alongside the rise of shadow banking activity.

(Read More: China Local Authority Debt 'Out of Control:' Auditor)

The shadow banking system is estimated at 22.8 trillion yuan ($3.7 trillion), equivalent to 44 percent of gross domestic product (GDP) and 25 percent of the total outstanding credit, according to Credit Suisse. It estimates that around half of the new credit issued last year was by shadow banks.

Frederic J. Brown | AFP | Getty Images

The Fund expects China's economy - which grew at a slower-than-expected 7.7 percent in the first quarter - to grow at around 8 percent in 2013 and 8.2 percent in 2014.

BoJ Action "Impressive"

The IMF is upbeat on the outlook for Japan after the country's central bank unveiled sweeping changes to its monetary policy earlier this month, upgrading its 2013 growth forecast for the country to 1.6 percent from 1.2 percent.

"With respect to monetary policy, the plans and objectives are impressive. The 2 percent inflation target is appropriate and the intention to double the monetary base is a good start," Decressin said.

(Read More: BoJ Throws In Kitchen Sink in War With Deflation)

At its policy meeting on April 4, the Bank of Japan made a commitment to double its government bond holdings in two years, adopt a new balance sheet target and combine two bond-buying schemes to allow it to buy government bonds of all maturities.

"The intention do more, if and when needed is also appropriate. What Japan needs to do more now is, with respect to fiscal policy. There is a need for a medium-term fiscal plan to make sure that once inflation rises it doesn't rise by too much."

(Read More: IMF: There Is No Silver Bullet for Debt Concerns)

Is the Yen Fairly Valued?

Discussing whether the Japanese yen, which has fallen 13 percent against the U.S. dollar this year, is now fairly priced, Decressin said, "If you look at standard valuations, it could look undervalued. However, if you look at the current account, which is weaker than expected, you do not come to that conclusion."

"The yen sends mixed signals at the moment and we'll need to think about that some more. But fundamentally, what the Japanese central bank is trying to achieve is a nominal depreciation of the yen and not a real depreciation of the yen," he added.

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