Why the IMF Might Be Wrong on China

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The International Monetary Fund (IMF) said on Wednesday that China should deliver fiscal stimulus if economic growth falls below the IMF's forecast of 7.75 percent this year. However, analysts don't think this may be the right prescription for the world's second biggest economy.

The IMF said it had lowered its growth forecast for China from 8 percent because of weak global economic growth and exports. It recommended fiscal stimulus if growth slows further.

The current debate raging over China's economy goes like this: should Beijing act now and boost a slowing economy or hold back and allow a restructuring in the economy, that is positive for the country's long-term growth outlook but implies a slowdown, to take hold.

"Is the IMF's advice the right one? It's almost like the IMF is asking China to do a global duty, but at the moment there's a lot of debate on getting the right kind of growth," Chong Yoon Chou, investment director at Aberdeen Asset Management, told CNBC Asia's "Cash Flow."

"It's not about the number, but the type of growth that they [China's policymakers] want. It's not about building highways and airports as in the past, it's about developing consumer spending and other parts of the economy," he added, referring to a drive by Beijing to rebalance its economy away from investment and exports to consumption and the services sector.

China's economic growth slowed unexpectedly in the first quarter of the year and its outlook has been in focus amid signs of weakness – data last Thursday showing an unexpected contraction in China's factory activity in May contributed to a hefty sell-off in global equities.

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The Chinese government targets a growth rate of 7.5 percent this year, the same as last year and there has been some talk lately the government could mull lowering its forecast to 7 percent next year in a sign that Beijing would be more comfortable with a slower pace of growth as the economy adjusts.

Analysts said one reason why China was unlikely to opt for monetary stimulus to boost growth was a concern that doing so could lead to overheating in the property market or exacerbate local government debt levels.

China's Premier Li Keqiang was quoted in mid-May by local media as saying the government had limited room to use government spending and policy stimulus to boost the economy.

"I think the scope for fiscal stimulus is muted partly because of worries about the implications," said Alistair Chan, an economist with Moody's Analytics in Sydney. "Both the premier and prime minister have suggested recently that further fiscal stimulus would be unlikely because local government debt levels are already high and they don't want to add to that."

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Chan said he forecast the Chinese economy to grow around 7.6 percent this year, adding that instead of implementing fiscal stimulus Beijing may choose to cut interest rates instead.

China's monetary policy has been on hold since last July, when the country's central bank lowered rates for a second straight month.