China Economic Update - June 2021

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00:05 China's economy will post strong growth in 2021,

00:08 assuming a continued suppression of COVID-19.

00:11 Growth is projected to reach 8.5% this year.

00:15 For next year,

00:16 we expect growth to slow to 5.4% as low base effects dissipate

00:20 and the economy returns to trend growth

00:23 as the recovery becomes more.

00:25 The structure of aggregate demand is expected to continue to rotate

00:29 toward private domestic demand.

00:31 Real consumption growth is expected

00:34 to gradually return to its pre-COVID-19 trend,

00:37 supported by the ongoing recovery in labor markets,

00:41 rising household incomes,

00:42 and improved consumer confidence.

00:45 Investment

00:46 will also remain a main engine of growth,

00:48 but its structure is expected to shift toward private

00:52 investment.

00:53 As the global recovery is gaining momentum,

00:56 export demand is expected

00:58 to remain robust in the short run.

01:00 However,

01:00 the contribution of net exports to growth will moderate

01:03 in the medium term as import growth picks up

01:06 and international

01:07 travel slowly resumes in 2022.

01:11 Despite the recent surge in imported raw material

01:14 prices and a pickup in domestic demand,

01:17 consumer price inflation is expected to remain below target.

01:20 This reflects the limited path through of

01:22 rising producer prices to consumer prices,

01:25 as well as the effect of pork price deflation

01:28 after last year's swine fever.

01:32 Given

01:32 persistent uncertainty,

01:34 the authorities

01:35 will need to stay agile and proactively adjust

01:38 the level and composition of macroeconomic policy support

01:42 as China's recovery firms up.

01:44 Macroeconomic policies are expected to shift

01:47 from accommodative

01:48 to more neutral settings.

01:49 The pace of policy normalization,

01:51 however,

01:52 should continue to be data dependent and calibrated

01:56 to the strengths of the recovery both here in China

01:59 as well as in the rest of the world.

02:01 Unless inflation moves well above target and inflation expectations

02:05 become unanchored,

02:07 monetary policy normalization should proceed cautiously.

02:10 Financial stability risks associated with high corporate leverage

02:14 and inflated property markets

02:16 will need to be closely monitored.

02:19 Rising corporate defaults

02:20 may cause short-term financial volatility,

02:23 but will improve risk pricing over the long run.

02:27 A strengthened corporate

02:28 insolvency framework

02:30 and banking resolution framework

02:32 would facilitate the orderly exit of weak

02:34 or failing corporates and banks,

02:36 freeing up resources

02:38 to flow to more productive uses.

02:40 Turning to fiscal policy,

02:42 China has policy space,

02:43 especially at the central level,

02:44 and policymakers should be ready to maintain fiscal support,

02:47 especially in case private demand remains

02:49 sluggish and external imbalances further increase.

02:53 Focusing this additional fiscal support on social

02:56 spending and green investment rather than traditional

02:58 infrastructure investment would not only help secure

03:01 the recovery and bolster short-term demand,

03:04 but also contribute to the intended medium-term rebalancing of China's economy.

03:09 Looking beyond this year's rebound,

03:11 policymakers should redouble their efforts

03:13 towards promoting growth enhancing structural reforms

03:17 and steering the economy

03:19 onto a greener,

03:20 more resilient and inclusive development path.

03:23 Achieving high quality growth requires mutually reinforcing reforms.

03:27 First,

03:28 more progressive taxation,

03:30 together with a stronger social safety net

03:32 would help curb high income inequality and boost consumer spending.

03:37 Second,

03:38 a wider use of carbon pricing,

03:40 together with scaled up green investment could accelerate

03:43 China's intended transition to low carbon growth in line

03:46 with its long-term objective of achieving

03:49 carbon neutrality by 2060.

03:51 Third,

03:53 continued opening up of domestic markets,

03:55 for example,

03:56 by further reducing the negative list for private

03:59 and foreign investment together with policies

04:01 to mitigate distortions in factor markets,

04:04 including in the financial system,

04:05 would improve resource allocation,

04:07 enhance competition,

04:09 and boost innovation.

04:10 A strong effort in this direction during China's 14th five-year plan

04:15 will raise productivity and incomes

04:17 and lead to more balanced,

04:18 consumption-driven and environmentally sustainable growth.

04:21 For more on this,

04:23 please download our report.

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transcript

China's economy will post strong growth in 2021, assuming a continued suppression of COVID-19. Growth is projected to reach 8.5% this year. For next year, we expect growth to slow to 5.4% as low base effects dissipate and the economy returns to trend growth as the recovery becomes more. The structure of aggregate demand is expected to continue to rotate toward private domestic demand. Real consumption growth is expected to gradually return to its pre-COVID-19 trend, supported by the ongoing recovery in labor markets, rising household incomes, and improved consumer confidence. Investment will also remain a main engine of growth, but its structure is expected to shift toward private investment. As the global recovery is gaining momentum, export demand is expected to remain robust in the short run. However, the contribution of net exports to growth will moderate in the medium term as import growth picks up and international travel slowly resumes in 2022. Despite the recent surge in imported raw material prices and a pickup in domestic demand, consumer price inflation is expected to remain below target. This reflects the limited path through of rising producer prices to consumer prices, as well as the effect of pork price deflation after last year's swine fever. Given persistent uncertainty, the authorities will need to stay agile and proactively adjust the level and composition of macroeconomic policy support as China's recovery firms up. Macroeconomic policies are expected to shift from accommodative to more neutral settings. The pace of policy normalization, however, should continue to be data dependent and calibrated to the strengths of the recovery both here in China as well as in the rest of the world. Unless inflation moves well above target and inflation expectations become unanchored, monetary policy normalization should proceed cautiously. Financial stability risks associated with high corporate leverage and inflated property markets will need to be closely monitored. Rising corporate defaults may cause short-term financial volatility, but will improve risk pricing over the long run. A strengthened corporate insolvency framework and banking resolution framework would facilitate the orderly exit of weak or failing corporates and banks, freeing up resources to flow to more productive uses. Turning to fiscal policy, China has policy space, especially at the central level, and policymakers should be ready to maintain fiscal support, especially in case private demand remains sluggish and external imbalances further increase. Focusing this additional fiscal support on social spending and green investment rather than traditional infrastructure investment would not only help secure the recovery and bolster short-term demand, but also contribute to the intended medium-term rebalancing of China's economy. Looking beyond this year's rebound, policymakers should redouble their efforts towards promoting growth enhancing structural reforms and steering the economy onto a greener, more resilient and inclusive development path. Achieving high quality growth requires mutually reinforcing reforms. First, more progressive taxation, together with a stronger social safety net would help curb high income inequality and boost consumer spending. Second, a wider use of carbon pricing, together with scaled up green investment could accelerate China's intended transition to low carbon growth in line with its long-term objective of achieving carbon neutrality by 2060. Third, continued opening up of domestic markets, for example, by further reducing the negative list for private and foreign investment together with policies to mitigate distortions in factor markets, including in the financial system, would improve resource allocation, enhance competition, and boost innovation. A strong effort in this direction during China's 14th five-year plan will raise productivity and incomes and lead to more balanced, consumption-driven and environmentally sustainable growth. For more on this, please download our report.

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china economic update june 2021

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china economic update june 2021

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