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Last Updated: Monday, 21 November 2005, 18:16 GMT
IMF warns on cost of China's boom
Chinese construction worker at building project in Beijing
China spends half of its annual income on investment
The International Monetary Fund (IMF) has urged China to tackle unbalanced growth by freeing up its currency further and rebalancing its economy.

In its annual consultations with the Chinese government, the IMF says that more emphasis needs to be placed on consumption rather than investment.

And it urges China to make further moves to raise the value of the yuan, following a 2.3% revaluation in July.

The IMF says that such a move would help to ease "global imbalances".

The Chinese economy is still powering ahead, according to the IMF, which monitors the world economy.

Growing surpluses

China is expected to grow by more than 9% this year, and its export-led growth is generating a huge trade surplus of more than $100bn - with China's total foreign currency reserves now totalling more than $700bn.

Rebalancing growth towards consumption is vital to sustain China's high growth rate.
David Burton, IMF Asia-Pacific Director

These imbalances are threatening the global recovery and stirring up protectionist pressures in the EU and the US, which have both recently negotiating deals to curb China's textile exports.

The IMF would like China to continue the process of gradual revaluation of the yuan that was started in July, when China ended its fixed exchange rate policy.

That would make Chinese goods more expensive, ultimately reducing their attractiveness on world markets, and make Western goods cheaper for Chinese consumers.

But so far the Chinese authorities have been reluctant to make further currency moves, fearing that it might destabilise foreign investment.

The IMF says that exchange rate flexibility "is the key to providing scope for monetary policy independence and enhancing the authorities' ability to manage the economy".

"We do see scope for greater flexibility and utilizing more fully the flexibility allowed in the existing system," said David Burton, director of the IMF's Asia-Pacific department.

Investment boom

The huge trade balances accumulating in Chinese banks are also helping to fuel the continuing boom in investment.

Chinese worker shovelling coal
China is investing in mining and energy production

Investment makes up 45% of China's entire economic output with only 55% going on consumption, double or triple the pattern in big industrialised countries.

Mr Burton told the BBC that he was encouraged by some slowdown in investment, in particular a move away from sectors which were suffering from over-capacity - such as steel and cement production - to transport and electricity, where there were bottlenecks.

But he added that investment was still "more than it should be as a proportion of GDP".

The IMF would like a "rebalancing" of growth to stimulate consumption, and also says that action is needed to spread the wealth from rich to poor, and from the cities to the countryside.

One way to do that would be to limit bank lending for private investment projects by big companies, and make credit more easily available to individuals to buy things.

Perhaps surprisingly, the vast bulk of Chinese investment is financed internally.

Private industry: 51%
Bank loans: 20%
Foreign investment: 4%
State budget: 4%
Other: 20%
Source: CEIC

Over half of investment is reinvestment of their own funds by state-owned firms, which do not distribute any of their profits to investors, while another 20% comes from bank loans.

Only 4% of investment is foreign capital, about the same as government investment in infrastructure like roads and airports.

The IMF also wants central government to give more money to local authorities in rural areas to improve health care and education.

It says that social reform, including pension reform, would give people more assurance about the future and encourage them to save less and spend more.

The IMF's intial discussions took place in April, but were only made public last week.

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