Following a sharp decline in the first quarter of 2020, economic activity and recovery in China has normalized faster than expected. An effective pandemic-control strategy, strong policy measures and buoyant exports boosted recovery in China. While swift, the recovery has been uneven, with domestic demand recovering more slowly than production, and consumption more slowly than investment, according to From Recovery to Rebalancing, the December 2020 edition of the World Bank’s China Economic Update, released today.
The report projects economic growth in China to slow sharply to 2 percent in 2020 before rebounding to 7.9 percent in 2021. Economic activity broadens to private investment and consumption, in response to improved consumer and business confidence and better labor market conditions.
Risks to economic recovery in China
Recovery risks are high
Risks to China’s economic recovery are high but broadly balanced. On the downside, recurrent COVID-19 flareups could continue to disrupt economic activity. This comes despite efforts to suppress the spread of the virus. The COVID-19 shock has also accentuated preexisting and interconnected vulnerabilities of corporate, bank and government balance sheets, which will weigh on China’s growth. The global environment will remain challenging and highly uncertain. Persistent bilateral tensions with major trading partners over trade and technology will continue to pose risks to a sustained recovery. Especially since external imbalances have resurfaced as a result of the COVID-19 shock and ensuing recovery. On the upside, a swift and widespread rollout of an effective vaccine would boost consumer and business confidence. It will support stronger growth and recovery in China.
“The withdrawal of fiscal support should proceed gradually, but the focus should shift from traditional infrastructure to more social spending and green investment.” said Martin Raiser, World Bank Country Director for China.
Structural reforms for recovery in China
Market-oriented structural reforms, complemented with fiscal measures will rebalance the economy. These reforms run towards a more domestic demand and especially consumption would help avoid a further decline in potential growth. It will reduce external imbalances and lay the foundation for a more resilient and inclusive economy. Reforms will reduce inequality in incomes and access to social services. Also it will include further liberalization and it will support the rebalancing to consumption.
Financial imbalances and Debt
The report highlights how China’s reform agenda is intrinsically linked to its spatial transformation. Regional disparities in output, labor productivity, and income across provinces and between urban and rural areas in China have narrowed since the mid-2000s. This convergence was driven by a surge in investment in lagging regions. Mounting financial imbalances and debt, and diminishing returns make further investment-driven convergence unsustainable.
Investments also in Asia – Pacific
“To rebalance the economy from investment to more innovation- and services-driven growth, China will need to embrace the growth potential of its most developed and innovative metropolitan areas and city clusters,” said Sebastian Eckardt, World Bank Lead Economist for China. “Such a shift will need to be accompanied by fiscal policies to ensure more equitable public service delivery and increased investment in human capital for people living outside urban areas and coastal provinces.”