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

IMF News, September 23, 2021

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First-half 2021 growth broadly in line with the July World Economic Outlook projection of "6 percent growth in 2021".
Recovery pattern: better-than-expected growth in Q1 2021 followed by loss of momentum in Q2 2021.
Near-term divergences and persistent fault lines from COVID-19 expected to leave lasting imprints on medium-term performance.
Vaccine access: widespread access mainly in advanced economies has helped contain deaths and hospitalizations and allowed greater normalization of economic activity; many emerging and developing economies with limited vaccine access continue to be held back.
Risks highlighted:
- Potential for new virus variants to set back progress.
- For emerging markets, faster-than-expected policy normalization in major economies could trigger adverse spillovers.
Inflation drivers: rise in commodity prices and supply disruptions preventing supply from keeping up with demand; price pressures expected to subside in 2022 for the most part; medium-term inflation expectations remain anchored to policy targets in most economies.
Scarring and vulnerabilities:
- Long-lasting and severe consequences for poverty.
- Public and private debt levels have risen substantially across economies, posing fiscal sustainability, investment, and growth challenges if not carefully managed.

China growth stance:
- Recovery has broadly converged to pre-pandemic trend levels.
- IMF projection for China: "growth for 2021 at about 8.0 percent."
Current concerns:
- Growth momentum is slowing; recovery could be more balanced with stronger private consumption.
- Fiscal contraction: speed and magnitude of China’s fiscal contraction in H1 2021 was much faster and bigger than anticipated, contributing to growth slowdown.
- Other temporary factors slowing growth: natural disasters, policy tightening across a range of sectors, and recurrent COVID outbreaks.
- Recurrence of COVID flareups has produced a stop-and-go growth pattern; zero-COVID strategy and localized outbreaks hinder full recovery of private demand in services.
Policy near-term guidance:
- Importance of continued vaccine development and distribution—especially critical in developing countries.
- Macroeconomic policy calibration: as China has frontloaded consolidation efforts, recommend a "more neutral fiscal stance coupled with moderately supportive monetary policy" to slow the drag on growth and secure the handoff to private demand.

Key headwinds to China’s growth identified:
- An aging population.
- Declining productivity growth amid pressures on globalization.
- Pandemic-related setbacks in rebalancing toward high-quality growth (balanced, inclusive, and green).
Benefits of rebalancing toward consumption and services:
- Shift from traditional investment to more consumption-led growth will decrease demand for heavy industrial goods and increase demand for consumer goods and services.
- Welfare gains as a more service-oriented economy is more reliant on labor and likely to lift the labor share of income.
- Climate benefits via reduced energy- and carbon-intensive heavy-industry leading to lower CO2 emissions.
Social protection recommendations to boost household consumption and inclusiveness:
- Strengthen social protection to reduce precautionary savings.
- Expand coverage and adequacy of social insurance programs—especially unemployment insurance—to support "common prosperity" objectives.

Progress: some progress on climate goals and rollout of the national ETS (Emissions Trading System).
To unlock ETS potential, recommended market reforms in the power sector are needed to:
- Pass on the carbon price to downstream sectors and consumers.
- Incentivize power producers to adjust production and investments.
China’s role: leadership in global climate efforts, co-chairing the G20 Sustainable Finance Study Group, and cooperation with the EU on green investment standards contributing to a greener recovery.

To raise productivity growth and promote market dynamism, recommended actions:
- Re-accelerate SOE reforms.
- Ensure competitive neutrality between all firms.
- Further open up domestic markets.
- Enhance digital platform competition via transparent and predictable approaches that preserve market efficiency and financial inclusion.
Policy design principles for new market entrants and regulation:
- Provide clear and predictable regulatory frameworks.
- Allow sufficient time for compliance.
- Leave space for dialogue with a broad set of stakeholders.
- Seek alignment with other countries where feasible to amplify benefits to global growth, employment, and technological advancement.
Expected outcomes:
- More affordable services, improved manufacturing productivity through better service inputs, increased innovation and exports of best practice, and improved living standards for Chinese workers and households.

China’s multilateral contributions noted:
- Broadening access to vaccines.
- Role in providing global debt relief for low-income countries.
- Support for multilateral trade, including engagement on WTO reform.
Debt relief context:
- Pandemic severity has worsened many countries' ability to service pre-crisis debt.
- Resolving unsustainable debts will require full commitment and expeditious action by all creditors, public and private, to restore sustainable debt trajectories and enable borrowers to contribute to global prosperity.
IMF role and tools:
- The IMF stands ready to support multilateral efforts.
- New SDR allocation supplements countries’ reserves and uses the collective strength of the Fund’s membership to make "all 190 member countries a little stronger."
- SDRs would provide liquidity support to many developing and low-income countries, allowing them to pay for healthcare and support vulnerable people.

With the right combination of policies and collective efforts, global growth can be steered back on track and the future will look brighter.
Closing: "Thank you. Xièxiè."

Geoffrey W.S. Okamoto, "China’s Post-Pandemic Growth: Deepening Reforms and Pursuing Rebalancing", September 22, 2021, IMF.