China’s Economy is Rebounding, But Reforms Are Still Needed

IMF News, February 3, 2023

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Authors: Diego A. Cerdeiro, Sonali Jain-Chandra February
Published: February 3, 2023

Near-term outlook and key projections

China’s economy is set to rebound this year as mobility and activity pick up after the lifting of pandemic restrictions.
The economy will expand 5.2 percent this year, according to our latest projections, versus 3 percent last year.
The Chinese economy is now expected to contribute a third of global growth this year.
Growth is currently below its potential amid muted inflation pressures.

Main risks and headwinds

The contraction in real estate remains a major headwind.
There is still some uncertainty around the evolution of the virus.
Longer-term headwinds include a shrinking population and slowing productivity growth.
Without reforms, growth is currently estimated to fall below 4 percent over the next five years.

Policy recommendations to sustain the recovery

Keep fiscal policy neutral this year.
Provide additional monetary policy accommodation to help secure the recovery.
Support orderly restructuring of troubled property developers to reduce risks.

Structural reforms to boost medium-term growth and inclusiveness

Raise labor supply by gradually lifting the retirement age.
Strengthen unemployment and health insurance benefits.
Reform state-owned enterprises to close their productivity gap with private firms.
These reforms are framed as ambitious but feasible and would raise the role of household consumption in demand.
Undertaking such reforms would enable China’s income level to rise by around 2.5 percent in five years.

Global spillovers

When China’s growth rate rises by 1 percentage point, growth in other countries increases by around 0.3 percentage points, according to recent IMF staff analysis.
Domestic reforms in China could therefore boost the global economy as well as China’s own.

Diego A. Cerdeiro and Sonali Jain-Chandra; February 3, 2023 — IMF

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