Official IMF assessment of the major risks to China’s economy, from press conference yesterday:

Over the past several years, China has made significant progress in reducing external imbalances. The current account surplus, for example, has declined sharply from 10 percent of GDP in 2007 to less than 3 percent of GDP last year and the real trade-weighted value of the renminbi has appreciated. With these developments, the undervaluation of the currency has been reduced. We now assess the renminbi to be moderately undervalued against a broad basket of currencies.

The external rebalancing, however, has come in large part with an increasing reliance on investment. This brings with it a set of risks around the worthiness of those investments and the sustainability of this approach. As the government acknowledges, reforms are needed to achieve quality growth that relies less on investment, more on consumption, and is environmentally friendly. In our view, these should include measures to raise household income, liberalize the financial system, strengthen the social security system while also lowering social contribution rates, appreciate the exchange rate, and increase the cost of various inputs to production. These priorities also feature in the 12th Five-Year Plan, but timely implementation will be key.

The reform process should go faster to avoid a further build-up of risks, produce a smooth and controlled adjustment to consumer-based growth, and contribute to the rebalancing of the global economy. Without these reforms, domestic imbalances could at some point unwind in a disorderly fashion and trigger an abrupt decline in investment. Our analysis, as part of the spillover report, indicates this would have a significant negative impact on China, commodity prices, and the global economy. More broadly, the spillover report itself highlights the economic tensions in all five systemic economies, and the importance of working collaboratively to resolve them.