Good but uncertain times: a time to prepare

Strong forecasts help build buffers

The current strong economic outlook provides a valuable opportunity to focus macroeconomic policies on building buffers, increasing resilience, and ensuring sustainability. In many countries in the region, continued fiscal support is less urgent given the strong economic performance, and policymakers should focus on ensuring that debt remains under control. Some countries should also focus on revenue mobilization to create space for infrastructure and social spending and to support structural reforms.

As for monetary policy, the policy stance can remain accommodative in much of the region given that inflation is generally still muted. Nonetheless, central banks should be vigilant, since our analysis suggests that much of the undershooting of inflation targets in Asia has been explained by temporary, global factors, such as commodity prices and imported inflation, which could reverse.

Therefore, tailored measures are needed to boost productivity and investment, narrow the gender gap in labor force participation, deal with the demographic transition, address climate change, and support those affected by shifts in technology and trade. And to reap the full benefits of the digital revolution, Asia will need a comprehensive and integrated policy strategy covering information and communications technology, infrastructure, trade, labor markets and education.

In China, reforms in the past two years have contributed to a reduction of near-term risks and stabilized the economy. In particular, progress has been made in financial deleveraging, which should continue. Recently issued regulation on asset management products and new liquidity rules are welcome and should help further unwind risks accumulated in the financial sector; key however, will be steadfast implementation.

It will be important to further slow credit growth and improve credit allocation efficiency, which should go hand-in-hand with State-owned enterprise reforms and more forceful exit of zombie companies. Fiscal policy that fosters consumption, while curtailing excessive investment especially at the local level, would facilitate rebalancing and contribute to higher quality of growth.

And these reforms should be accompanied by further strengthening policy frameworks, for example, giving People's Bank of China more operational independence to implement monetary and exchange rate policy, and allowing the market to play a more decisive role.

Alfred Schipke is IMF senior resident representative for China, and Longmei Zhang is IMF deputy resident representative for China.