THE OECD HAS revised upwards its projections for China’s GDP growth to 8.5% this year and 5.3% in 2022.
Overall, the OECD revised up its growth projections across the world’s major economies in the latest edition of its Economic Outlook to 5.8 % this year (4.2% projected in December) and 4.4% in 2022 (3.7% in December). It says the global economy has now returned to pre-pandemic activity levels. It attributes the improvement to vaccine roll-outs and US fiscal stimulus.
For China, the OECD expects:
Investment will remain a key engine of growth, while consumption will recover only gradually. Robust export demand will keep industry capacity utilisation high. The low import content of consumption means that the surge of imported raw material prices will only have a limited impact on consumer price inflation.
The OECD expects monetary policy to turn more neutral as the recovery continues. With China hit earliest with lockdowns, Beijing provided a strong stimulus in 2020. Fiscal policy will offer less support this year than last but not be removed completely. For example, companies in hard-hit industries and regions will be able to continue paying reduced social security contributions for unemployment and work injury insurance into 2022.
With the recovery continuing to be driven by infrastructure investment — construction activity has been robust over the past year and is picking up further — debt remains the elephant in the room. Bond defaults are rising, and the share of defaulting local-government-owned enterprises is increasing sharply.
While the upside of these will be to sharpen risk pricing and gradually remove implicit guarantees, corporate deleveraging and addressing local-level debt with potential contingent liabilities for local governments remain priorities.
The OECD says that Beijing should strengthen the social safety net to switch saving for healthcare, childcare and old age into consumption and to restart rebalancing the economy from investment to consumption — a reiteration of orthodox advice salted this time with the exhortation that Beijing should use the pandemic as cause to push through structural reforms to strengthen social protections in short order.
In the nearer term, trade tensions with both the United States and the EU will continue to weigh on exports. However, stronger-than-expected foreign demand as the rest of the world speeds up its recovery could cancel out that impact for Chinese exporters.
The pandemic remains the significant downside risk. Vaccination rates have been picking up but still lag international standards and appear to hold back the improvement in consumer confidence needed to boost domestic consumption. Low vaccination rates also prevent the re-opening of borders and slow the recovery of the tourism industry. A vaccine-resistant strain of Covid-19 could also jeopardise the recovery.