OECD Sees China’s Economy Contracting This Year

THE OECD’S FORECAST for China’s economy this year is grimmer than that of the World Bank. In its newly published Economic Outlook, it foresees the economy contracting by 2.6% this year, with a 3.7% contraction if there is a second wave of Covid-19 infection bringing renewed lockdowns before the end of the year. The OECD says both scenarios are equally likely.

Grim reading though that makes, as the OECD’s chart above shows, China will be less badly scarred by the pandemic than most countries. Like the World Bank, the OECD sees China’s economy returning to growth in 2021 but a second wave of infection globally would push the rebound deeper into the year.

The organisation also notes the patchwork return from lockdowns, saying that tourism-related industries and firms heavily dependent on foreign demand are far from fully resuming activities:

Industrial firms have resumed production, but are operating at capacity utilisation rates that are 10 percentage points lower than normal. Smaller and private firms, due to their concentration in consumer goods manufacturing and exporting industries, and tourism-related services, are particularly hard hit, leading to a jump in urban unemployment. Migrant workers, who move to cities for temporary jobs, are not captured by such data, as they can hardly afford to stay in cities once they lose their job.

The OECD highlights some of the bankruptcy risks to small and medium sized firms that would otherwise be viable and stresses the need for official support so such firms can be kept clear of the shadow banking system. Debt expansion, by government at all levels, state-owned enterprises and small and medium-sized private companies is a risk that requires diligent monitoring.

The organisation also underscores the importance to China of the region’s recovery, not least for politically important jobs generation. On the whole, East and Southeast Asian governments reacted quickly and effectively to the pandemic, which offers a rare silver lining to otherwise dark clouds:

A faster-than-expected recovery from the virus crisis in Asian countries would boost not only exports, as these are the fastest-growing markets, but also employment, as export-driven firms account for nearly a quarter of total employment. Moreover, as half of exports are delivered by private firms, an export recovery would halt the decline of the private investment share.

The OECD calls for the pandemic to be taken as an opportunity to strengthen social protection, including out-of-pocket healthcare costs, to encourage consumer spending. For the same reason, it would also like to see a speeding up of the reform of the household registration system to grant access to public services to all. Such structural changes are necessary for the rebalancing from investment to consumption.