Following a sharp decline in the first quarter of 2020, economic activity in China has normalized faster than expected, aided by an effective pandemic-control strategy, strong policy measures and buoyant exports. 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 in2020 before rebounding to 7.9 percent in 2021, as economic activity broadens to private investment and consumption, in response to improved consumer and business confidence and better labor market conditions.
Risks to China’s economic recovery are high but broadly balanced. On the downside, recurrent COVID-19 flareups could continue to disrupt economic activity, 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 is expected to 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 and support stronger growth.
“The global environment remains highly uncertain and this calls for an adaptive policy framework. A premature policy exit and excessive tightening could derail the recovery,” said Martin Raiser, World Bank Country Director for China. “The withdrawal of fiscal support should proceed gradually, but the focus should shift from traditional infrastructure to more social spending and green investment.”
Market-oriented structural reforms, complemented with fiscal measures to rebalance the economy towards more domestic demand and especially consumption would help avoid a further decline in potential growth, reduce external imbalances and lay the foundation for a more resilient and inclusive economy. Reducing inequality in incomes and access to social services, including through further liberalization of the hukou system would support the rebalancing to consumption.
The report highlights how China’s reform agenda is intrinsically linked to its spatial transformation. While 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.
“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.”