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

_IMF News, September 24, 2020_

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## Bibliographic details
- Authors: Geoffrey Okamoto
- Published: September 24, 2020

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### 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.*

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## References

- [Geoffrey W.S. Okamoto](https://www.imf.org/en/About/senior-officials/Bios/geoffrey-w-s-okamoto/)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2020/09/24/sp092420-securing-china-s-post-pandemic-recovery_