Securing China’s Post-Pandemic Recovery: Deepening Reforms and Pursuing Rebalancing

IMF News, September 24, 2020

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Authors: Geoffrey Okamoto
Published: September 24, 2020

Global Economic Outlook

IMF cut its global growth forecast to - 4.9 percent this year.
Over two years, the world economy will suffer a dramatic loss of more than $12 trillion.
Many economies are reopening and global activity has started to gradually strengthen; a partial and uneven recovery is expected in 2021.
Output levels are expected to remain well below pre-pandemic trends over the medium term almost everywhere.
Tremendous uncertainty remains; prolonged disruption from the virus is the greatest concern.
Downside risks dominate despite potential upside from medical breakthroughs on vaccines and treatments.
China can play an important leadership role by supplying medical and protective equipment and providing debt relief to low-income countries.
China’s recovery that supports sustainable “green” growth and helps the global trade and investment system adjust would deliver broad benefits.

China’s Policy Response Is Key for the Recovery

Findings on China’s recent performance:

Real GDP growth moved from negative 6.8 percent in the first quarter to positive 3.2 percent in the second quarter.
Recovery continued into the third quarter by all indications.

Policy measures enacted:

The People’s Bank of China established lending facilities with a capacity of more than 2 trillion RMB to fund loans for small businesses, poverty alleviation, and agricultural firms.
Regulators encouraged forbearance of small business loans.
Fiscal policy, supported by monetary policy and still-easy financial conditions, is providing critical growth support.
State-owned enterprises (SOEs) are supporting employment, increasing investment, and helping small and medium enterprises (SMEs) in their supply chains.

Structural challenges and risks:

Private investment and consumption are lagging due to repeated local outbreaks, continued social distancing, and slowly improving labor market conditions.
Social safety nets have limited capacity: the bottom40 percent of households hold only about 5 percent of total financial assets.
Unconventional policy support risks creating “zombie” companies that could undermine competitiveness and long-term growth.
Rising debt levels and financial vulnerabilities in smaller banks could reverse recent progress on financial stability.

Path to Resilient Recovery and Rebalancing

Policy priorities (four highlighted areas):

Calibrate macroeconomic support
- Phase out economic lifelines gradually as private demand strengthens.
- Focus on households to give them means and confidence to increase consumption given high and rising private and public debt levels.
- Strengthen social safety nets to lift demand and make the recovery more sustainable and balanced [by helping lower China’s savings rate and reliance on investment].
- Less than half of the urban labor force—and less than 20 percent of migrant workers—are covered by unemployment insurance; addressing coverage gaps will support consumption.

Strengthen financial stability
- Gradually phase out unconventional solvency support through regulatory forbearance as the recovery proceeds.
- Use micro- and macroprudential policies to prevent the build-up of systemic risks.
- Step up regulatory reforms in the asset management sector.
- Bolster capital buffers of banks and progress towards a consistent bank resolution framework.

Lift productivity, especially in the service sector
- Further open non-strategic sectors and lower barriers to entry for private firms.
- Wind down non-viable SOEs and improve SOE governance.
- Improve labor mobility through hukou and land reforms to support macroeconomic rebalancing and allow workers to move where job availability is highest.
- Create conditions for young and private firms to thrive, noting IMF research shows these firms tend to be more productive.

Promote sustainable “green” growth
- Seize the opportunity of low oil prices to further improve carbon pricing or introduce carbon taxes.
- Scale up investments in climate-resilient infrastructure and green technology to boost employment now and increase economic and environmental resilience for decades.
- Recent floods in China caused economic costs in the tens of billions of dollars; green resilience investments can reduce such losses going forward.

Synergies from simultaneous reforms:

Opening the service sector can absorb employment losses from SOE reform.
Winding down non-viable companies frees credit for the private sector, including SMEs.
Boosting carbon tax revenues creates budget space to help finance an expanded social safety net.

Collective Efforts

Success in securing China’s recovery will generate positive spillovers for the global economy.
The IMF will continue to work with China: the China team will conduct their annual “Article IV” visit in the fall, and capacity development collaboration continues in a virtual format.
The IMF has provided emergency financing at unprecedented speed and scale and is ready to provide further support to a wider range of low- and middle-income countries.
The IMF expects to triple in size its zero-interest credit to low-income countries to help meet large financing needs in this time of crisis.
Collective action is necessary: together, countries can promote strong and inclusive growth and create a more prosperous and resilient world for all.

Source: Speech by Geoffrey W.S. Okamoto, IMF First Deputy Managing Director, Forum on National Affairs, Counsellors’ Office of the State Council, September 24, 2020.