China must avoid ‘premature’ exit from economic support given ‘precarious’ global outlook: World Bank

Frank Tang
·5-min read

China should avoid a “premature” exit from its economic support policies given the “precarious” global outlook next year, according to the World Bank.

“A premature policy exit and excessive tightening [following the coronavirus pandemic] could derail the recovery,” the Washington-based World Bank warned on Wednesday, urging the People’s Bank of China to “proceed cautiously” in tightening its monetary policy.

“Despite an initial rebound, the global economy remains in recession, and its recovery path is uneven and precarious. In addition, near-term global prospects have recently dimmed amid re-escalating Covid-19 outbreaks and renewed lockdowns in several major economies.”

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To rescue its coronavirus-hit economy earlier this year, China unleashed a flurry of stimulus measures, including the issuance of special treasury bonds, lower lending rates and tax exemptions, while it also lifted the fiscal deficit ratio to a record high of 3.6 per cent of gross domestic product (GDP).

And after its economy shrank by 6.8 per cent in the first quarter after the coronavirus shut down large swathes of the country, China was the first major economy to show a recovery with a growth rate of 3.2 per cent in the second quarter and 4.9 per cent in third. The stimulus effort, though, brought with it concerns over its record high debt level.

In its latest issue of its China Economic Update, the World Bank urged the country to strengthen its “still fragile private demand”, embrace “market-oriented, structural reforms”, and increase external incentives for change by joining the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP).

CPTPP is an 11-nation trade deal between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. President Xi Jinping’s said last month that China “will actively consider” joining the formerly American-backed accord.

“Going forward, joining the CPTPP could provide an anchor for additional reforms, as China’s [World Trade Organization] accession did almost 20 years ago,” the World Bank said.

The Covid-19 shock has accentuated pre-existing domestic and external macroeconomic imbalances, lending additional urgency to reforms to rebalance the economy

World Bank

“The Covid-19 shock has accentuated pre-existing domestic and external macroeconomic imbalances, lending additional urgency to reforms to rebalance the economy.

“Over the medium term, deeper structural reforms to engender more balanced, inclusive, and sustainable growth remain a central policy priority for China.”

The Washington-based agency forecasts that China’s GDP growth will slow to 2 per cent this year, down from 6.1 per cent in 2019, before accelerating to 7.9 per cent in 2021, as consumer spending and business investment continue to catch up, along with improving corporate profits, labour market conditions and incomes.

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However, headline GDP growth is estimated to moderate to 5.2 per cent growth in 2022 given domestic obstacles.

In particular, the World Bank also pointed to China’s rising mountain of debt – a result of this year’s stimulus measures – while noting that vulnerabilities in fiscal, corporate and banking sector balance sheets would all weigh on growth.

The macro leverage ratio, a widely watched risk parameter gauging overall debt, rose by 24.7 percentage points in the first nine months of the year to 270.1 per cent of GDP, according to data from the National Institution for Finance and Development, a Beijing-based think tank.

Although the annual Central Economic Work Conference, which concluded on Friday, explicitly mentioned the goal of stabilising the leverage ratio, it pledged to continue “necessary support” for the economic recovery and will make “no U-turn” when there are still many outlook uncertainties due to the coronavirus and the external environment.

The continued stability mindset is needed as the ruling Communist Party will celebrate its 100th anniversary next year and is striving for a good start in its 2021-25 development plan.

Expanding on its warning against a premature stimulus policy exit, the World Bank said China’s central bank should continue its accommodative monetary stance and focus on maintaining adequate liquidity. It added that China could use its fiscal space to hedge against downside risks and boost private demand.

“Focusing these fiscal efforts on social spending and green investment rather than traditional infrastructure investment would not only bolster short-term demand but contribute to the intended medium-term rebalancing to greener and more inclusive growth,” it suggested.

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The agency also called for the further opening up of China’s domestic market, saying this would create more competition and facilitate the exchange of knowledge and technologies.

Beijing has been reiterating that it is committed to opening up and to free trade. Last month, the long-awaited Regional Comprehensive Economic Partnership was signed to create the world’s largest trade bloc, though its implementation is pending final approval by members.

Aside from tariff reductions and measures to improve market access and infrastructure connectivity, the Chinese government was advised to focus more on “behind-the-border issues”, including intellectual property rights, trade-in services and public procurements.

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