China’s Post-Pandemic Growth: Deepening Reforms and Pursuing Rebalancing
September 22, 2021
1. Greetings
Good morning—zao shang hao!
I am delighted to join you again at this year’s Forum and would like to thank you for the opportunity to share a few thoughts on the outlook for the global economy and China, and highlight key policy priorities for the period ahead.
2. Global economic outlook
The global economic recovery continues even as the pandemic resurges. Growth outturns for the first half of the year were broadly in line with our July World Economic Outlook projections of 6 percent growth in 2021. This reflects better-than-expected growth in the first quarter, followed by a loss of momentum in the second quarter.
At the same time, the fault lines opened up by COVID-19 are looking more persistent, as near-term divergences in economic and social outcomes are expected to leave lasting imprints on medium-term performance.
Widespread vaccine access, mainly in advanced economies, have helped contain deaths and hospitalizations even where new cases have surged. In turn, this has allowed for greater normalization of economic activity.
However, many emerging and developing economies with limited vaccine access continue to be held back as the pandemic persists. Their output loss relative to pre-pandemic trends is projected to remain sizable.
Looking ahead, risks remain elevated, not least from the possibility of new virus variants arising and setting back progress everywhere. For emerging markets, faster than expected policy normalization in major economies could also trigger adverse spillovers, further setting back their recoveries.
Inflation has also risen, with the drivers including a rise in commodity prices and disruptions that have prevented supply from keeping up with demand. For the most part, price pressures are expected to subside in 2022. Expectations of medium-term inflation remain anchored to policy targets in most economies.
On top of this, the crisis is leaving deep scars. Its consequences for poverty, for example, will likely be long-lasting and severe. Vulnerabilities have also increased, with public and private debt levels having risen substantially across economies. If not carefully managed, this will pose challenges to fiscal sustainability, investment, and growth for some economies.
3. The recovery is taking hold
As for China, the good news is that the recovery is taking hold. Growth has already broadly converged to pre-pandemic trend levels, and we are projecting growth for 2021 at about 8.0 percent. The not-so-good news is that the growth momentum is slowing. The recovery could also be more balanced with stronger private consumption.
Because China is ahead of the curve in the recovery, it is not surprising that it is one of the first countries to normalize its macroeconomic policies. Yet, the speed and magnitude of China’s fiscal contraction in the first half of this year was much faster and bigger than anticipated, contributing to the growth slowdown. Other temporary factors slowing down growth were natural disasters, a string of other policy tightening across a range of sectors reflecting different policy priorities, and recurrent COVID outbreaks as the pandemic continues to cast its shadows.
In fact, the recurrence of COVID flareups has forced sequential growth into a stop and go pattern this year. The combination of a zero-COVID strategy and localized outbreaks will make it hard for a complete recovery of private demand in services.
So, in China as elsewhere, it is critical that we overcome the crisis by continuing to develop effective vaccines and making sure shots get into arms. This is especially critical in developing countries, many of which have benefited from China’s support in vaccines and medical equipment.
Moreover, macroeconomic policies should be carefully calibrated to the needs of the recovery. In the near term, as China has already frontloaded its consolidation efforts, a more neutral fiscal stance coupled with moderately supportive monetary policy will slow the drag on growth and secure the handoff to private demand.
4. Looking ahead beyond the recovery
Given China’s more advanced recovery, this is a good time to look more deeply at the fundamental drivers of growth. There are many well-known headwinds to China’s growth -- chief among them an aging population, declining productivity growth at a time when globalization is under pressure, and pandemic-related setbacks in rebalancing towards high-quality growth—growth that is balanced, inclusive, and green.
So how do we prevent these headwinds from steering growth off course?
Rebalancing offers multiple benefits for high-quality growth. For one, the shift from traditional investment to more consumption-led growth will decrease demand for heavy industrial goods and increase demand for consumer goods and services. This is good news for people’s welfare, as a more service-oriented economy will be more reliant on labor than before and will likely lift the labor share of income as a result. This is also good news for climate as a reduction in the high energy- and carbon-intensive heavy-industry will lead to a fall in CO2 emissions.
To boost household consumption and make growth more inclusive, China needs to strengthen its social protection program to reduce the need to insure against individual risks through precautionary savings. Expanding coverage and adequacy of the social insurance program—especially unemployment insurance—will help in this regard. Ensuring that everybody, including the most vulnerable households, can fall back on a reliable social safety net makes for more inclusive growth, squarely in line with China’s “common prosperity” goal.
As for green growth, China has made some progress in achieving its climate goals. The rollout of the national ETS could ultimately transform the power sector by efficiently and cost-effectively reducing China’s CO2 emissions. To unlock the full potential of this market-based carbon pricing tool, however, market reforms in the power sector are needed to pass on the carbon price to downstream sectors and consumers, and to incentivize power producers to adjust their production and investments.
At the crux of the matter as we look ahead is how to sustain growth, especially in light of declining productivity and headwinds to globalization.
As policymakers are already well aware, to raise productivity growth and promote market dynamism, China needs to re-accelerate its SOE reforms, ensure competitive neutrality between all firms, and further open up its domestic markets. A transparent and predictable way to enhance digital platform competition that preserves market efficiency and financial inclusion benefits can also be helpful.
China can apply the same fundamental insights that make its manufacturing exports a phenomenal success to achieve world-class services sector, be it financial, education, health, or utilities. By weakening protection and encouraging entry, competitive pressure will help transform work practice across Chinese firms. A business that has access to reliable markets and customers data, quality suppliers, efficient distribution network, for instance, will be able to adapt best practice to local market conditions and achieve superlative operating performance.
A more dynamic economy is facilitated by new market entrants in new industries, often where existing regulation is unclear or missing altogether. These new entrants must contribute positively to growth, to employment, and to technological advancement. As a general matter, policymakers should strive to provide clear and predictable regulatory frameworks, allow sufficient time for compliance, and leave space for dialogue with a broad set of stakeholders. In a time of rapid technological advancement, many countries are also at the same juncture and face the same challenges. If countries take steps to ensure their approaches are aligned with one another, the benefits to global growth, employment, and technological advancement will be even greater.
More services will be produced at more affordable prices. Manufacturing productivity is likely to improve further as quality and cost of service inputs improve. Even more Chinese firms will innovate and export best practice to the world. Chinese workers and households will be made considerably better off, putting the global economy in a much stronger position.
Lastly, China has much to give as to gain by contributing to multilateral efforts. These include China’s important contributions to broaden access to vaccines and its role in providing global debt relief for low income countriess. The severity and length of the pandemic has materially worsened the ability for many countries to continue servicing the debt they took on before the crisis. Prior international experience tells us that resolving unsustainable debts is going to require the full commitment and expeditious action of all creditors, public and private. By helping to put countries on a sustainable debt trajectory, these creditors will help borrowers make larger contributions to global prosperity in the coming years.
China is also a key contributor in supporting multilateral trade—including through WTO reform. Its leadership role in global climate efforts including the co-chairing of the G20 Sustainable Finance Study Group and cooperation with the EU on green investment standards contributes to a greener recovery.
At the IMF we are ready to lend our support in all of these endeavors. Our new SDR allocation supplements countries’ reserves, using the collective strength of the Fund’s membership to make all 190 member countries a little stronger. It would provide liquidity support to many developing and low-income countries that are struggling, allowing them to pay for healthcare and support vulnerable people.
With the right combination of policies and the collective efforts of us all, we can steer global growth back on track, and the future will look brighter.
Thank you. Xièxiè.