China Economic Update - December 2020

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00:05 Economic activity in China normalized faster than expected,

00:09 helped by an effective pandemic control strategy,

00:12 strong policy support,

00:13 and resilient exports.

00:15 While swift,

00:16 the recovery was uneven,

00:18 with domestic demand recovering more slowly than production

00:21 and consumption recovering more slowly than investment.

00:25 We expect growth to slow down to 2% this year before recovering strongly

00:30 by 7.9% next year

00:32 as private investment

00:34 and business and consumer confidence return to normal levels.

00:38 Even as GDP returns to its pre-pandemic level by mid-2021,

00:44 the COVID shock has accentuated pre-existing

00:46 imbalances and highlighted structural challenges.

00:49 The pandemic and ensuing recovery have caused imbalances

00:52 in the structure of aggregate demand to relapse

00:55 as households increased savings,

00:58 government support stressed investment,

01:00 and external imbalances widened.

01:03 Debt,

01:04 already high before the pandemic,

01:05 has increased further.

01:07 Unwinding these imbalances and interrelated vulnerabilities in fiscal,

01:11 corporate,

01:12 and banking sector balance sheets

01:14 will weigh on China's growth,

01:16 especially as the economy returns to a path of secular moderation

01:20 following next year's strong rebound.

01:24 The external environment is expected to remain challenging

01:28 and highly uncertain.

01:29 Despite an initial rebound,

01:31 the global recovery

01:33 remains precarious

01:35 amid re-escalating COVID-19 outbreaks and renewed

01:38 lockdowns in several major economies,

01:41 entrenched

01:42 geoeconomic tensions,

01:44 most notably

01:46 persistent bilateral frictions

01:48 with main trading partners.

01:49 Over trade and technology also continue

01:52 to pose risks to China's sustained recovery

01:55 and its medium-term growth prospects.

01:58 This calls for an adaptive policy framework that

02:00 is carefully calibrated to the pace of the recovery

02:03 both in China and the rest of the world.

02:06 A premature policy exit,

02:08 and excessive tightening could derail the recovery.

02:12 The return

02:13 to a neutral policy stance

02:15 should proceed cautiously.

02:17 At the same time,

02:18 monetary policy should return to more conventional tools while phasing out

02:23 window guidance,

02:24 lending targets,

02:25 and re-lending facilities

02:27 that were adopted to provide targeted support in the context.

02:31 Of the COVID-19 shock.

02:33 Similarly,

02:34 regulatory forbearance measures that were necessary

02:38 to deal with temporary liquidity problems

02:41 should be rolled back to facilitate recognition and resolution

02:45 of non-performing assets

02:46 and to mitigate risks of zombification of bad credit.

02:50 Along with flexible and supportive monetary policy,

02:53 China could use its fiscal space to hedge against downside risks to growth

02:58 and ensure smooth rotation

03:00 from public to private demand.

03:03 Focusing these measures.

03:05 On social spending and green investment rather than on traditional

03:09 infrastructure investment

03:11 would not only bolster short-term demand

03:13 but contribute to the intended

03:15 medium-term rebalancing to a greener,

03:18 more inclusive growth path.

03:21 Some of the special direct fiscal transfers to local governments

03:26 that were implemented this year could be extended through

03:29 next year and explicitly targeted to increase social spending

03:34 and or green investment by local governments.

03:38 Market-oriented structural reforms

03:40 would help avoid a sharper decline in potential growth,

03:44 reduce external imbalances,

03:45 and lay the foundation for a more resilient and inclusive economy.

03:50 Strengthened insolvency and bank resolution frameworks would facilitate an

03:54 orderly exit of weak or failing corporates and banks,

03:58 reduce overcapacity,

04:00 and assist in the deleveraging process

04:02 while enabling resources to reallocate to more productive uses.

04:06 Further extending hukou liberalization to China's large cities

04:11 would lower barriers to labor mobility

04:13 and equalize access to services while boosting

04:16 urbanization as a key driver of growth.

04:20 These reforms should be accompanied by

04:23 further opening of China's domestic markets,

04:26 particularly in service sectors,

04:28 to enhance competition and facilitate the fusion of technology

04:32 as a key driver of productivity growth.

04:34 Finally,

04:35 analysis presented in this edition of the China Economic Update

04:39 suggests

04:40 that reforms to boost potential output growth,

04:42 inclusiveness,

04:43 and resilience

04:44 are intrinsically linked to China's spatial transformation process.

04:49 While regional disparities in output,

04:51 labor productivity,

04:52 and income

04:53 have narrowed since the mid-2000s,

04:56 this convergence was largely driven by a surge in investment in lagging region.

05:01 This has led to growing financial imbalances,

05:03 mounting debt,

05:04 and diminishing returns to investors.

05:05 That constrain further investment-driven catch up growth

05:10 to rebalance the economy from an investment to

05:12 a more innovation and service-driven growth model,

05:15 China will need to embrace the growth potential of its most developed

05:20 metropolitan areas and city clusters.

05:23 Alongside reforms to foster market integration

05:27 and urbanization,

05:28 China will have to use fiscal policy to ensure equitable access to public services

05:33 and investment in human capital

05:35 in areas outside the coastal and most developed metropolitan areas.

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Economic activity in China normalized faster than expected, helped by an effective pandemic control strategy, strong policy support, and resilient exports. While swift, the recovery was uneven, with domestic demand recovering more slowly than production and consumption recovering more slowly than investment. We expect growth to slow down to 2% this year before recovering strongly by 7.9% next year as private investment and business and consumer confidence return to normal levels. Even as GDP returns to its pre-pandemic level by mid-2021, the COVID shock has accentuated pre-existing imbalances and highlighted structural challenges. The pandemic and ensuing recovery have caused imbalances in the structure of aggregate demand to relapse as households increased savings, government support stressed investment, and external imbalances widened. Debt, already high before the pandemic, has increased further. Unwinding these imbalances and interrelated vulnerabilities in fiscal, corporate, and banking sector balance sheets will weigh on China's growth, especially as the economy returns to a path of secular moderation following next year's strong rebound. The external environment is expected to remain challenging and highly uncertain. Despite an initial rebound, the global recovery remains precarious amid re-escalating COVID-19 outbreaks and renewed lockdowns in several major economies, entrenched geoeconomic tensions, most notably persistent bilateral frictions with main trading partners. Over trade and technology also continue to pose risks to China's sustained recovery and its medium-term growth prospects. This calls for an adaptive policy framework that is carefully calibrated to the pace of the recovery both in China and the rest of the world. A premature policy exit, and excessive tightening could derail the recovery. The return to a neutral policy stance should proceed cautiously. At the same time, monetary policy should return to more conventional tools while phasing out window guidance, lending targets, and re-lending facilities that were adopted to provide targeted support in the context. Of the COVID-19 shock. Similarly, regulatory forbearance measures that were necessary to deal with temporary liquidity problems should be rolled back to facilitate recognition and resolution of non-performing assets and to mitigate risks of zombification of bad credit. Along with flexible and supportive monetary policy, China could use its fiscal space to hedge against downside risks to growth and ensure smooth rotation from public to private demand. Focusing these measures. On social spending and green investment rather than on traditional infrastructure investment would not only bolster short-term demand but contribute to the intended medium-term rebalancing to a greener, more inclusive growth path. Some of the special direct fiscal transfers to local governments that were implemented this year could be extended through next year and explicitly targeted to increase social spending and or green investment by local governments. Market-oriented structural reforms would help avoid a sharper decline in potential growth, reduce external imbalances, and lay the foundation for a more resilient and inclusive economy. Strengthened insolvency and bank resolution frameworks would facilitate an orderly exit of weak or failing corporates and banks, reduce overcapacity, and assist in the deleveraging process while enabling resources to reallocate to more productive uses. Further extending hukou liberalization to China's large cities would lower barriers to labor mobility and equalize access to services while boosting urbanization as a key driver of growth. These reforms should be accompanied by further opening of China's domestic markets, particularly in service sectors, to enhance competition and facilitate the fusion of technology as a key driver of productivity growth. Finally, analysis presented in this edition of the China Economic Update suggests that reforms to boost potential output growth, inclusiveness, and resilience are intrinsically linked to China's spatial transformation process. While regional disparities in output, labor productivity, and income have narrowed since the mid-2000s, this convergence was largely driven by a surge in investment in lagging region. This has led to growing financial imbalances, mounting debt, and diminishing returns to investors. That constrain further investment-driven catch up growth to rebalance the economy from an investment to a more innovation and service-driven growth model, China will need to embrace the growth potential of its most developed metropolitan areas and city clusters. Alongside reforms to foster market integration and urbanization, China will have to use fiscal policy to ensure equitable access to public services and investment in human capital in areas outside the coastal and most developed metropolitan areas.

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worldbank/China Economic Update Dec 2020

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China Economic Update Dec 2020

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China Economic Update Dec 2020

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