PR21/1
IMF Executive Board Concludes 2020 Article IV Consultation with the People’s Republic of China FOR
IMMEDIATE
RELEASE
Washington,
DC
–
January
8,
2021:
The
Executive
Board
of
the
International
Monetary
Fund (IMF)
concluded
the
Article
IV
consultation 1
with
the
People’s
Republic
of
China.
The
Chinese
economy
continues
its
fast
recovery
from
the
pandemic,
helped
by
a
strong containment
effort
and
swift
policy
actions
to
mitigate
the
impact
of
the
crisis.
GDP
growth
is projected
at
1.9
percent
in
2020
and
7.9
percent
in
2021,
as
economic
activity
continues
to normalize
and
domestic
outbreaks
remain
under
control.
Core
inflation
is
expected
to
remain subdued,
leaving
CPI
inflation
in
2020-21
below
the
pre-crisis
target
of
about
3
percent.
Corporate
leverage
is
expected
to
rise
by
about
10
percentage
points
of
GDP
in
2020.
The current
account
surplus
is
projected
to
widen
to
1.9
percent
of
GDP
in
2020
from
1.0
percent in
2019,
before
narrowing
to
below
1
percent
in
2021.
The
projected
temporary
increase
this year
reflects
lower
commodity
prices,
the
collapse
in
outbound
tourism,
and
a
surge
in
exports of
pandemic-related
and
other
goods
supported
by
China’s
early
recovery
of
production
and higher
export
prices.
Macroeconomic
and
financial
policies
have
supported
the
recovery.
Policymakers
have provided
financial
relief
and
fiscal
support
to
protect
the
most-affected
firms
while
safeguarding
financial
stability,
including
by
providing
liquidity
to
the
banking
system, expanding
re-lending
facilities
to
smaller
enterprises,
and
introducing
a
repayment
moratorium until
Q1
2021.
The
authorities
have
also
increased
the
disbursement
and
coverage
of unemployment
insurance
to
help
vulnerable
households
and
provided
tax
relief
and
waived social
security
contributions
by
employers.
Against
this
backdrop,
the
general
government deficit
(including
estimated
off-budget
investment
spending)
is
projected
to
rise
to
18.2
percent of
GDP
in
2020
from
12.6
percent
in
2019.
Structural
reforms
have
progressed
despite
the
pandemic,
but
not
evenly
across
key
areas. The
opening
of
the
financial
sector
has
advanced
with
a
further
shortening
of
the
negative
lists for
foreign
investment
and
the
removal
of
restrictions
on
the
investment
quota
for
foreign institutional
investors.
Labor
market
reforms,
such
as
hukou
reforms,
have
improved
labor mobility,
and
the
patent
law
was
amended
to
strengthen
intellectual
property
protection
and foster
innovation.
At
the
same
time,
progress
in
real-sector
reform
has
been
slow,
especially
in the
area
of
state-owned
enterprises
and
competitive
neutrality
between
private
and
state- owned
firms.
1 Under
Article
IV
of
the
IMF"s
Articles
of
Agreement,
the
IMF
holds
bilateral
discussions
with
members,
usually
every
year.
A
staff team
visits
the
country,
collects
economic
and
financial
information,
and
discusses
with
officials
the
country"s
economic
developments and
policies.
On
return
to
headquarters,
the
staff
prepares
a
report,
which
forms
the
basis
for
discussion
by
the
Executive
Board.
Executive
Board
Assessment 2
Executive
Directors
noted
that
the
COVID-19
crisis
has
inflicted
significant
human
and economic
costs
on
China
and
commended
the
authorities
for
the
effective
containment measures
and
swift
macroeconomic
and
financial
policy
support
to
mitigate
the
economic impact
of
the
pandemic.
Directors
noted,
however,
that
growth
was
still
unbalanced
and
that fiscal,
monetary,
and
structural
policies
should
aim
at
strengthening
private
demand
to
allow for
more
balanced
medium-term
growth.
Directors
called
for
a
continuation
of
the
moderately
supportive
fiscal
and
monetary
policies until
the
recovery
is
on
solid
ground,
while
noting
that,
in
the
medium
term,
fiscal
consolidation was
necessary
to
ensure
debt
sustainability.
To
maximize
the
policy
space,
they
saw
benefits in
further
improving
the
macro-fiscal
framework,
including
intergovernmental
coordination
and macroeconomic
data,
and
called
for
a
modernization
of
the
monetary
policy
framework
to strengthen
the
transmission
of
conventional
interest
rate
policies
and
enhance
financial intermediation.
Some
Directors
encouraged
the
authorities
to
focus
on
broader
concepts
of
the
fiscal
deficit.
Directors
also
called
for
enhancements
to
the
social
safety
net
to
reduce precautionary
savings,
which
combined
with
greater
progressivity
in
the
tax
system
would
help address
income
inequality.
Directors
stressed
the
importance
of
addressing
financial
vulnerabilities
proactively
to safeguard
financial
stability.
As
the
recovery
takes
hold,
the
temporary
measures
supporting the
financial
sector
should
be
replaced
with
policies
to
address
problem
loans
and
strengthen regulatory
and
supervisory
frameworks.
Directors
noted
the
need
for
a
comprehensive
bank restructuring
framework
in
line
with
international
best
practices
to
allow
for
the
orderly
exit
of weaker
banks.
While
agreeing
with
the
authorities
on
the
potential
benefits
from
digital currencies,
Directors
considered
that
more
work
was
needed
to
assess
risks.
They
also encouraged
the
authorities
to
continue
improving
their
AML/CFT
framework.
Directors
welcomed
continued
progress
on
structural
reforms,
particularly
in
further
opening up
of
the
financial
sector
and
improving
labor
mobility
through
hukou
reforms.
They
stressed the
need
for
further
reforms
of
SOEs,
including
ensuring
competitive
neutrality
between
SOEs and
private
enterprises,
and
some
Directors
called
for
the
need
to
remove
remaining
implicit guarantees.
Structural
reform
will
be
key
to
boosting
potential
growth,
reduce
external imbalances,
and
build
a
more
resilient,
green,
and
inclusive
economy.
Directors
noted
that
while
the
current
account
surplus
in
2020
should
widen
temporarily,
it
is expected
to
narrow
over
the
medium
term,
reflecting
an
unwinding
of
the
temporary
impact
of the
pandemic
and
a
rebalancing
of
economic
growth.
Directors
also
stressed
that
greater exchange
rate
flexibility
would
help
the
economy
adjust
to
the
changing
external
environment. Some
Directors
called
for
further
improvement
in
the
transparency
of
foreign
exchange interventions
and
phasing
out
of
capital
flow
management
measures.
Directors
welcomed
the
authorities’
commitment
to
global
cooperation,
and
noted
that
China, together
with
its
partners,
had
an
important
role
to
play
in
supporting
an
open
and
rules-based international
trade
system.
Directors
also
welcomed
China’s
intention
to
play
an
important
role in
multilateral
efforts
to
address
pressing
global
challenges,
including
making
any
approved
2 At
the
conclusion
of
the
discussion,
the
Managing
Director,
as
Chairman
of
the
Board,
summarizes
the
views
of
Executive
Directors, and
this
summary
is
transmitted
to
the
country"s
authorities.
An
explanation
of
any
qualifiers
used
in
summings
up
can
be
found
here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
vaccine
developed
in
China
widely
available
to
other
countries
and
in
mitigating
climate change.
They
noted
that
China
has
a
key
role
to
play
in
the
G-20
DSSI
and
Common Framework
to
provide
debt
relief
to
low-income
countries,
but
noted
that
further
improvements in
data
transparency
were
needed
for
the
success
of
the
global
debt
relief
efforts.
They welcomed
China’s
ambitious
plans
for
emissions
abatement
and
increased
green
investment.
NATIONAL ACCOUNTS China: Selected Economic Indicators 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Projections
(Annual percentage change, unless otherwise indicated) Real GDP (base=2015)
6.9 6.8 6.9 6.7 6.1 1.9 7.9 5.7 5.6 5.5 5.4 Total domestic demand
7.3 7.9 6.8 7.4 5.5 1.5 8.7 5.8 5.6 5.6 5.4 Consumption
8.3 8.5 7.3 8.1 6.4 -0.8 11.3 6.4 6.5 6.2 6.1 Investment
6.1 7.2 6.1 6.5 4.5 4.6 5.4 5.1 4.6 4.8 4.5 Fixed
7.9 7.3 5.9 7.1 5.1 4.3 6.3 4.9 4.6 4.8 4.5 Inventories (contribution) -0.6 0.0 0.1 -0.2 -0.2 0.2 -0.3 0.1 0.0 0.0 0.0 Net exports (contribution) -0.1 -0.8 0.3 -0.5 0.7 0.4 -0.5 0.0 0.0 0.0 0.0 Total capital formation (percent of GDP)
43.0 42.7 43.2 44.0 43.1 43.1 41.8 41.2 40.4 39.6 38.8 Gross national saving (percent of GDP) 1/
45.8 44.5 44.8 44.1 44.1 45.0 42.7 42.0 41.1 40.2 39.4 LABOR MARKET
Unemployment rate (annual average) 2/
5.0 5.0 5.0 4.9 5.2 5.4 … … … … … Employment
0.3 0.2 0.0 -0.1 -0.1 -0.3 0.2 0.1 0.1 0.1 0.1 PRICES
Consumer prices (average)
1.4 2.0 1.6 2.1 2.9 2.4 0.5 1.9 1.9 2.0 2.0 GDP Deflator
0.1 0.9 3.9 3.5 2.4 2.1 1.6 2.1 2.1 2.2 2.2 FINANCIAL
7-day repo rate (percent)
2.4 2.7 5.4 3.1 3.1 … … … … … … 10 year government bond rate (percent)
3.7 3.0 3.9 3.3 3.2 ... ... ... ... ... ... Real effective exchange rate (average)
9.8 -4.9 -2.9 1.4 -0.8 … … … … … … Nominal effective exchange rate (average)
9.7 -5.4 -2.5 1.5 -1.8 … … … … … … MACRO-FINANCIAL
Total social financing
12.5 30.5 14.1 10.3 10.7 13.8 12.2 9.4 8.8 8.4 7.9 In percent of GDP
200 242 248 248 253 276 283 287 290 291 292 Total nonfinancial sector debt 3/
14.5 16.8 14.3 10.8 10.7 13.9 12.4 9.8 9.2 8.7 8.2 In percent of GDP
222 241 248 248 253 277 284 289 293 295 297 Domestic credit to the private sector
15.9 12.6 11.6 8.3 9.2 12.0 11.0 7.9 7.5 7.1 6.5 In percent of GDP
161 168 169 166 167 179 182 182 181 180 178 House price 4/
9.1 11.3 5.7 12.3 8.6 7.0 6.5 6.2 5.9 5.8 5.7 Household disposable income (percent of GDP)
61.1 61.6 60.1 59.3 59.1 57.6 59.2 59.1 58.9 58.6 58.3 Household savings (percent of disposable income)
38.4 37.2 35.7 34.8 34.4 37.1 33.7 31.8 29.9 27.9 25.9 Household debt (percent of GDP)
39.1 44.7 48.9 52.3 55.6 58.3 61.3 62.4 64.0 64.9 66.0 Non-financial corporate domestic debt (percent of GDP)
122 124 120 113 111 121 120 119 117 115 112 BIS credit-to-GDP gap (percent of GDP)
25.4 20.8 11.8 0.3 -2.2 … … … … … … GENERAL BUDGETARY GOVERNMENT (Percent of GDP)
Net lending/borrowing 5/ -2.8 -3.7 -3.8 -4.7 -6.3 -11.9 -11.0 -10.1 -9.1 -8.3 -7.5 Revenue
28.8 28.2 27.8 28.3 27.7 24.5 25.0 25.3 25.8 26.5 27.1 Additional financing from land sales
1.9 2.0 2.5 2.8 2.9 2.9 2.9 2.9 2.9 2.9 2.9 Expenditure
33.5 33.9 34.2 35.8 36.9 39.3 38.9 38.3 37.9 37.8 37.6 Debt 6/
36.7 36.7 36.2 36.5 38.1 44.7 47.2 49.5 51.2 52.6 53.8 Structural balance -2.5 -3.4 -3.6 -4.5 -6.0 -10.6 -10.3 -9.6 -8.8 -8.1 -7.5 BALANCE OF PAYMENTS (Percent of GDP)
Current account balance
2.7 1.8 1.6 0.2 1.0 1.9 0.9 0.8 0.8 0.6 0.5 Trade balance
5.2 4.4 3.9 2.9 3.0 3.5 2.6 2.8 2.6 2.5 2.4 Services balance -2.0 -2.1 -2.1 -2.1 -1.8 -1.1 -1.3 -1.7 -1.7 -1.7 -1.7 Net international investment position
15.1 17.4 17.1 15.5 14.7 16.1 15.2 14.8 14.4 13.9 13.4 Gross official reserves (billions of U.S. dollars) 3,406 3,098 3,236 3,168 3,223 3,579 3,842 4,127 4,427 4,734 5,056 MEMORANDUM ITEMS
Nominal GDP (billions of RMB) 7/ 69,209 74,598 82,898 91,577 99,493 103,462 113,377 122,286 131,750 142,072 153,020 Augmented debt (percent of GDP) 8/
55.2 66.4 72.8 76.4 80.5 91.7 96.4 101.4 105.6 109.3 112.7 Augmented net lending/borrowing (percent of GDP) 8/ -8.7 -15.9 -13.5 -11.8 -12.6 -18.2 -17.2 -16.3 -15.4 -14.6 -13.8 Sources: Bloomberg, CEIC, IMF International Financial Statistics database, and IMF staff estimates and projections. 1/ IMF staff estimates for 2019. 2/ Surveyed unemployment rate. 3/ Includes government funds. 4/ Average selling prices estimated by IMF staff based on the data of national housing sale values and volumes published by the National Bureau of Statistics 5/ Adjustments are made to the authorities" fiscal budgetary balances to reflect consolidated general budgetary government balance, including government-managed funds, state- administered SOE funds, adjustment to the stabilization fund, and social security fund. 6/ The estimation of debt levels after 2015 assumes zero off-budget borrowing from 2015 to 2025. 7/ Expenditure side nominal GDP. 8/ The augmented balance expands the perimeter of government to include government-managed funds and the activity of local government financing vehicles (LGFVs).
December 2, 2020 PEOPLE"S
REPUBLIC
OF
CHINA
STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION KEY ISSUES Context. The Chinese economy continues its fast recovery from the health and economic crisis as a strong containment effort and macroeconomic and financial policy support have mitigated the crisis impact and helped the economy rebound. However, growth is still unbalanced as the recovery has relied heavily on public support while private consumption is lagging. Rising financial vulnerabilities and the increasingly challenging external environment pose risks to the outlook. Important reforms have progressed despite the crisis, but unevenly across key areas. Policies. Key policies to secure the recovery and return to balanced growth include: Adjusting policy support to the recovery. As private demand improves, macro policy support should remain moderately expansionary in 2021. Fiscal policy should shift its focus towards strengthening social safety nets and promoting green investment. Given low inflation, monetary policy should remain accommodative while phasing out potentially distortionary measures such as lending targets and lending rate guidance as the recovery takes hold. Making policy support more effective to maximize policy space. With public debt high and rising, improving the macro-fiscal framework and intergovernmental coordination while leveraging digital technologies to deliver support to vulnerable groups will make fiscal policy more effective. Further modernization of the monetary policy framework to strengthen the transmission of conventional interest rate policies would help improve credit intermediation. Containing rising financial risks proactively. As the recovery takes hold, exceptional policy support measures should be replaced with proactive efforts to address problem loans and strengthen regulatory and supervisory frameworks. Resuming financial regulatory strengthening will help reduce shadow-banking risks. A comprehensive bank restructuring framework is needed to lower systemic risks and continue de-risking. Structural reforms to enhance the role of the private sector. Simultaneous implementation of key reforms—a further opening up of domestic markets, reforming SOEs, and ensuring competitive neutrality with private firms while promoting green investment and strengthening social safety nets—will support a job-rich and balanced recovery and help boost potential growth, reduce external imbalances, and build a more resilient, green, and inclusive economy. Leading global solutions. China should continue to lead multilateral efforts to address global challenges. This includes supporting global efforts to expand vaccine access, providing debt relief to low-income countries and sustainable financing for global infrastructure investment, and tackling climate change. China and its trading partners should work together to build a more open, stable, and transparent rules-based international trade system.
Approved
By
Kenneth Kang and Sanjaya Panth
CONTENTS
COVID-19 CRISIS AND RISING EXTERNAL TENSIONS
4 UNBALANCED RECOVERY SO FAR
5 GRADUAL HANDOFF TO PRIVATE DEMAND
12 POLICIES TO SECURE THE RECOVERY AND RETURN TO BALANCED GROWTH
18 A. Supporting Growth and Ensuring Financial Stability
18 B. Maximizing Policy Space by Improving Policy Transmission
25 C. Adjusting Macroeconomic Policy to the Pace of the Recovery
28
INCLUSIVE, GREEN, AND HIGH-QUALITY GROWTH
29 A. Re-Accelerating Reforms to Support Balanced Growth
29 B. Helping Solve the Global Crisis
33 STAFF APPRAISAL
34 BOXES 1. China’s Exit Strategy From COVID-19
37 2. Impact of China’s Monetary and Credit Policies Amid COVID-19
38 3. Tracking Economic Activity in China
40 4. Lockdowns’ Spillovers Through Trade
41 5. Progress on Structural Reforms
42 6. The Effects of Technological Decoupling
43 7. China’s Fiscal Policy: A Medium-Term Rebuilding
44 8. China’s Development of a Central Bank Digital Currency
45 9. Summary of the Communique on China’s 14th 5-Year Plan
46 Discussions took place by video conference October 26-November 4, 2020. The team comprised H. Berger (head), D. Cerdeiro, W. Chen, F. Han, S. Jahan, J. Kang, C. Ruane (all APD), J. Ralyea (FAD), H. Hoyle (MCM), F. Zhang (RES), H. Lin (SPR), and S. Barnett, P. Jeasakul, and X. Li (Resident Representatives). K. Kang (APD) joined the concluding meetings. Z. Jin, Z. Zhang, and Y. Liu (all OED) joined the official meetings. A. Balestieri, J. Li, Q. Shan, and C. Zhou supported the mission.
FIGURES 1. Recent Developments—The V-Shaped Recovery
47 2. Rebalancing—Regression in Wake of the Crisis
48 3. External—Increasing Current Account Surplus and Volatile Capital Flows
49 4. Fiscal—Pandemic Response Accentuated Existing Trends
50 5. Monetary—Policy Eased but Inflation Remained Low
51 6. Credit—Credit Growth Accelerated and Debt Levels Increased
52 7. Financial Market—Funding Conditions Turned Tighter After Initial Easing
53 8. Banks—Sector Expands Amid Rising Profitability Pressures
54
TABLES 1. Selected Economic Indicators
55 2. Balance of Payments
56 3. External Vulnerability Indicators
57 4. Monetary and Credit Developments
58 5. General Government Fiscal Data
59 6. Nonfinancial Sector Debt
60 7. Rebalancing Scorecard
61 8. SOE Performance
62
APPENDICES I. External Sector Assessment
63 II. Risk Assessment Matrix
65 III. Debt Sustainability Analysis
66 IV. Implementation of Main Recommendations of the 2019 Article IV Consultation
78 V. Implementation of Main Recommendations from China’s 2017 FSAP
84
Source:
China
National
Health
Commission. Note:
Imported
cases
are
not
included.
15-Nov-20
0
0
20-Jan-20
12-Mar-20
12-Mar-20
20
2,000
40
6,000
4,000
60
8,000
80
10,000
100
12,000
After Mar
12
120
Before Mar
12
14,000
China:
Local
outbreaks
since
March
have
been
contained
(Daily
increase
of
confirmed
Covid-19
cases
in
China) 16,000
140
China:
Amid
pandemic,
China‘s
“Phase
1”
U.S.
imports
rising more
slowly
than
implied
by
the
agreement
(In
billions
of
U.S.
Dollar;
cumulative
amount) 250
200
150
Purchase commitment
(with even
monthly targets)
100
2017
Baseline
50
2020
Actual
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source:
China
Customs
and
IMF
staff
calculations.
Note:
The
annual
target
for
2020
is
$219
billion,
assuming
China
keeps
its imports
of
other
U.S.
goods
that
are
not
covered
by
the
“Phase
1“
agreement
at the
2017
level
of
$47
billion.
COVID-19 CRISIS AND RISING EXTERNAL TENSIONS 1. The COVID-19 crisis has inflicted significant human and economic costs on China, but a strong containment effort has kept the outbreak under control. Human and economic costs were the highest in the first quarter. China was the first country to suffer a COVID-19 outbreak, which took the lives of more than 4,600 people. But the extension of the national Lunar New Year holiday, travel restrictions, and the lockdown of Hubei province (the epicenter of the outbreak), along with other measures, have helped contain the spread of the virus in China even as it has spread globally. Economic activity came to a sudden halt, with GDP contracting by 6.8 percent (y/y) in the first quarter for the first time in more than 40 years. Effective and well-targeted containment efforts have helped the economy go back to work. Containment measures have been calibrated across regions based on specific risk assessments, and the resumption of economic activity has prioritized low-risk regions and essential sectors. With the virus retreating at the national level, the government has successfully adopted a granular and targeted approach in response to localized outbreaks, by combining intensive testing, effective contact tracing, and localized mobility restrictions (Box 1). At the same time, policy support has helped rapidly expand testing capacity and increase production of medical and protective supplies, while digital technologies such as big data and artificial intelligence have been leveraged to facilitate contact tracing and, where still necessary, travel and other restrictions.
2. The pandemic has taken place as the external environment has become more challenging. The tensions with the U.S. have escalated beyond trade to technology access and
financial markets. 1
While China and the U.S. remain committed to the “Phase 1” deal, trade data for the first ten months of the year suggest China’s purchases of goods would have to accelerate significantly to meet the purchase commitments. Trade disputes have also emerged elsewhere and concerns about the reliability of global supply chains have prompted some countries to bring production home or reduce reliance on any single trading partner such as China, while rules on inward foreign direct investment (FDI) have been tightened. The European Union is considering whether foreign subsidies distort its internal market, and the resulting regulatory amendments could have consequences for Chinese firms operating abroad. 3. Reforms have continued, but there is still significant room to improve economic resilience. Despite the crisis, important progress has been made, for example, in financial sector opening up. However, reform progress on state-owned enterprises (SOEs) and competitive neutrality has been lagging, contributing to lower productivity and growth. China’s reliance on external demand has declined significantly, but, lacking a strong social safety net, household saving remains excessively high. Financial regulatory strengthening has advanced, but financial vulnerabilities remain elevated. While not closing these reform gaps ahead of the crisis has left China’s economy less resilient than it could have been, pressing ahead with reforms will help secure the recovery, accelerate the return to more balanced growth, and contribute to lowering global imbalances.
UNBALANCED RECOVERY SO FAR 4. Strong and swift policy actions helped mitigate the economic impact of the crisis and prepare the recovery. Policymakers provided financial relief and fiscal support to protect the most-affected firms while safeguarding financial market stability through liquidity provision to the banking system. The People’s Bank of China (PBC) expanded its re-lending facilities to provide targeted support to manufacturers of medical supplies and daily necessities as well as micro-, small- and medium-sized enterprises (MSMEs). The authorities have allowed banks to avoid classifying troubled loans to epidemic-hit MSMEs as non-performing loans (NPLs), tolerated rising NPLs in heavily impacted regions and sectors, and introduced a repayment moratorium for most MSMEs and other eligible firms until early 2021. For households, the authorities accelerated disbursement of unemployment insurance while extending its coverage to some migrant workers and lengthening the application and benefit period by six months to 18-30 months. The authorities also provided various tax relief measures and waived part of social security contributions by employers to protect employment. Moreover, the government has increased spending on epidemic prevention and control and the national public health emergency management system.
1
Among other actions, the U.S. has tightened export restrictions to selected Chinese technology companies, enacted a law that can lead to sanctions on foreign financial institutions operating in Hong Kong SAR, and taken steps to delist Chinese firms from U.S. stock exchanges that fail to comply with U.S. accounting standards and to force sales of Chinese firms to the U.S.
2020M10
5. With the successful reopening of the economy, fiscal policy has shifted to demand support. Staff estimates that discretionary fiscal measures amount to about 4.7 percent of GDP in 2020, centered on an increase in infrastructure investment, providing an estimated boost of 2.2 percentage points to GDP growth. With automatic stabilizers further increasing spending and lowering revenue, the augmented general government deficit is projected to rise by 5.6 percentage points of GDP to 18.2 percent in 2020. 2
Augmented debt is expected to reach 92 percent of GDP—much higher than the EM average of about 64 percent—and continue to rise over the medium term. While debt is high, the public finances benefit from a very advantageous growth-interest rate differential and a high national savings at around 43 percent of GDP, bound to be invested domestically. 6. Monetary policy has been supportive, leaning heavily on non-interest rate instruments. The PBC has lowered various policy rates— in particular, the 7- and 14-day short-term reverse repo rates by 30 basis points and 1-year medium-term lending facility (MLF) rate by 30 basis points—reducing loan rates especially to corporates. However, slow adjustment of deposit rates and capital shortages in smaller banks have constrained some banks’ ability to provide new financing to the private sector (SIP 1).
To provide additional support especially to smaller firms, the PBC, in collaboration with other authorities, has deployed a wide range of non-interest rate instruments, including further expanding its re-lending facilities with guidance on lending rates, reducing targeted reserve requirement ratios (RRRs), increasing bank lending targets, expanding credit support by policy banks, subsidizing local banks’ loan repayment moratoria, and introducing a new zero- interest “funding-for-lending” scheme for uncollateralized lending to micro- and small-sized enterprises. These measures, combined with window guidance to steer credit to hard-hit sectors, had a significant positive impact on bank lending as well as corporate and government bond issuance, leading to a rapid credit expansion with total social financing (TSF) growth accelerating to 13.7 percent (y/y) as of October, up from 10.7 percent at end- 2019 (Box 2).
7. Following the fast rebound in the second quarter, the economy continued its fast recovery in the third quarter, but growth remains unbalanced.
2
The general budgetary deficit and debt would rise to 3.7 and 44.7 percent of GDP, respectively, in 2020. Source:
CEIC;
and
IMF
staff
calculations.
2020M11
2020M7
2020M4
2020M1
1.0
2019M10
China:
Monetary
policy
support
included
lower
policy
rates
(In
percent) 3.5
3.0
2.5
2.0
1.5
7-day
reverse
repo
rate 14-day
reverse
repo
rate 1-year
targeted
MLF
rate
1-year
MLF
rate
2020Q2
The recovery so far has relied heavily on public support, while private consumption remained weak. Real GDP grew by 4.9 percent (y/y) in the third quarter, following the rebound of 3.2 percent in the second quarter (Box 3). The rapid recovery was driven by the combination of a large increase in government spending, heavy on investment, and the decision to prioritize opening production facilities in the exit from the lockdown. Real estate investment returned to positive growth by the summer, with housing starts outpacing sales. Following the recovery in manufacturing, private investment strengthened around the same time. In contrast, the recovery of private consumption has been much more gradual, reflecting continued social distancing in person-to-person services, a significant drop in the growth of average household income amid still-weak labor market conditions, and the increase in precautionary savings owed, in part, to the still very limited social safety net. Real retail sales are still below their pre-crisis levels and unemployment remains elevated. 3
Exports have held up well despite the more difficult external environment. While the pandemic and lockdowns significantly compressed global trade overall (Box 4), Chinese firms—supported by an earlier recovery of production—have seen strong demand for medical and protective equipment and work-from-home-related electronics, with demand broadening beyond pandemic-related goods more recently. The value of merchandise exports increased by 0.5 percent (y/y, in USD) in the first 10 months of 2020, despite an
3
The official survey-based urban unemployment rate has improved to 5.3 percent in October, down from 6.2 percent in February. However, this statistic likely underestimates the remaining impact of the crisis as it does not fully capture job losses among migrant workers. New urban jobs that have been created this year until October remained about 15 percent below new urban job creation during the same period in 2019. China:
“V”-shaped
recovery
driven
by
investment
while consumption
recovers
more
slowly
(Real
growth
in
percent,
year-on-year) 10
8
6
4
2
0
-2
Net
Export
Investment
-4
Consumption
GDP
-6
-8
2015Q1
2015Q4
2016Q3
2017Q2
2018Q1
2018Q4
2019Q3
2020Q3
Source:
CEIC;
and
IMF
staff
calculations.
China:
Private
consumption
impacted
by
falling
household income
and
higher
precautionary
savings
(Nominal
growth
in
percentage
points,
2020
minus
2019) 10
5
0
-5
-10
-15
Consumption
Growth
Income
Growth
Savings
Rate
-20
Q1
Q2
Q3
Source:
CEIC;
NBS
Household
Survey;
and
IMF
staff
calculations.
Note:
Savings
Rate
calculated
as
(1
-
household
consumption
per
capita
/ household
disposable
income
per
capita).
China:
Export
rebound
driven
by
pandemic-related
goods
(In
percent,
year-on-year
growth
of
3-month
sum
of
USD
export
value) 12
10
8
6
4
2
0
-2
-4
All
other
goods
-6
Textiles
(incl
facemasks)
-8
Office
machines
-10
Medical
devices
-12
Total
-14
-16
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
Source:
CEIC;
and
IMF
staff
calculations.
2020M9
10
0
-10
Private
enterprises
-20
-30
2019M2
2019M5
2019M8
2019M11
2020M3
2020M6
2020M10
Source:
China
National
Bureau
of
Statistics
and
IMF
staff
calculations.
Note:
Public
enterprises:
Investment
in
construction
and
purchase
of
fixed assets
by
state
owned
and
controlled
enterprises.
Private
enterprises: Domestic
investment
in
construction
and
purchase
of
fixed
assets
by collective,
private,
and
personal
enterprises
and
institutional
units
as
well
as the
enterprises
controlled
by
these
units.
Public
enterprises
20
China:
SOEs
led
the
recovery
in
corporate
investment
(Nominal
growth
in
percent,
year-on-year) 30
estimated decline in volume of 3 percent. On the other hand, the value of merchandise imports declined by 2.3 percent (y/y, in USD) during the same period, reflecting mostly lower commodity prices as import volume increased by an estimated 4 percent. The relatively strong domestic recovery, improved global risk sentiment, and continued financial opening- up have attracted large portfolio inflows since the second quarter. 4
8. Core inflation has been subdued, while food price inflation has stabilized. Reflecting a still-large output gap—estimated at around -3½ percent of potential GDP on average for 2020—core CPI inflation, which tends to reflect demand conditions with a lag, remained at 0.5 percent (y/y) in October. Food price inflation, which stayed high due to the lingering effects of the African swine fever and heavy rains and floods in the summer, has recently stabilized, leading to the decline o...
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