The current slowdown in the Chinese economy is not a bad thing given that it was overheating just a year ago, Zhu Min, Deputy Managing Director of the International Monetary Fund (IMF), said Wednesday. He added that Beijing has plenty of room to maneuver monetary and fiscal policies if it wanted to shore up the economy.
Chinese Premier Wen Jiabaoalso said on Tuesday that the slowdown in the economy is stabilizing and China is on track to meet this year’s 7.5 percent annual growth target.
“The target is 7.5 percent, which is very much in line with the policy adjustments the Chinese government has made to slow growth, which is good for China,” Zhu told CNBC on the sidelines of the World Economic Forum meeting in the Chinese port city of Tianjin. “That is because China faced a little bit of overheating, roughly 12-18 months ago.”
Recent data from China has been bleak – exports fell by more than expected in August, while growth in industrial output last month recorded its slowest pace in more than three years.
Many economists have scaled back their forecasts for Chinese gross domestic product (GDP) growth this year in the face of weak data - the IMF in July lowered its 2012 growth forecast to 8 percent from 8.2 percent. Indeed, if China meets its 7.5 percent growth target for 2012 that would mark its weakest growth in 13 years.
This faster-than-anticipated slowdown in the world’s second largest economy has put the spotlight on Beijing, which is under pressure to take more action to boost growth .
In a sign that China is speeding up steps to boost the economy, more than $150 billion worth of infrastructure projects were approved last week. Wen said on Tuesday that China could also use a 100 billion yuan ($15.8 billion) fiscal stability fund to boost growth, while there was another 100 billion yuan in a stabilization fund that could be accessed if necessary.
Room to Move
Zhu said China had plenty of room to act both in monetary and fiscal terms to boost growth – something it may have to do to protect the export sector weather poor demand in Europe and the U.S.
“China still has a lot of policy space. As the premier mentioned yesterday (Tuesday), China still has a budget surplus and also a 100 billion yuan fund they can use. The government deficit is roughly less than 3 percent (of GDP) and total debt is roughly 28 percent (of GDP), so a there is lot of fiscal room,” Zhu, a former deputy governor of China’s central bank, said.
“Also if you’re looking at interest rates, there is a lot of monetary room as well,” he added.
China has cut interest rates twice this year, in June and July. It has also eased monetary policy by lowering banks’ reserve requirement ratios three times since November last year.
- By CNBC's Dhara Ranasinghe