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OECD Sees Recovery Hope For China’s Economy In 2023

Table showing OECD GDP growth forecasts for 2022 and 2023 as updated in September 2022

THE OECD HAS cut its forecast for China’s GDP growth this year by 1.2 percentage points to 3.2%, citing repeated lockdowns under the zero-Covid policy and the crisis in the property market.

Its latest interim Economic Outlook, updating its June numbers, paints a grim picture of the worldwide shock stemming from Russia’s attack on Ukraine. The ensuing energy crunch and surge in food prices have inflicted a widespread cost-of-living crisis. The OECD is holding its global growth forecast unchanged at 3.0% but sees growth slowing next year by 0.6 of a percentage point to 2.2% as inflation becomes entrenched.

In contrast, the OECD sees a recovery in China next year to 4.7% growth on the back of policy stimulus and a rebound from this year’s Covid lockdowns. It does not see much, if any, further monetary easing, but it expects stimulus measures worth up to 2% of GDP to strengthen infrastructure investment. However, even 4.7% growth would still be 0.2 of a percentage point lower than the OECD’s previous forecast.

It also expects China’s headline inflation next year to be around 3%, a higher level than in the recent past. China has had relatively low and stable inflation by world standards, despite the upward pressures from food and energy.

The OECD’s recovery growth forecast for 2023 turns on Beijing dealing with the continuing real estate downturn amidst elevated corporate debt levels. It also warns that risks remain of sustained weaker private domestic demand, a veiled reference to the continuance of strict zero-Covid protocols.

As a measure of how the world has been changed by Russia’s invasion of Ukraine, it is worth remembering that a year ago, the OECD was expecting China’s economy to grow by 5.8% this year.

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OECD Leaves Its China Growth Forecast Unchanged

THE OECD’S LATEST update to its Economic Outlook, published today, leaves its forecasts for China’s growth rate for this year and next unchanged from its May projections of 8.5% and 5.8%, respectively.

By comparison, for the G20 countries, the OECD is forecasting 6.1% growth this year, down 0.2 of a percentage point from its previous forecast, and 4.8% for 2022, up 0.1 of a percentage point.

In passing, we should note that China is not a member of the OECD, although it has a participatory working relationship with it. Thus, China does not get the detailed discussion in the OECD’s commentary on its Economic Outlook that the International Monetary Fund would give it.

That said, the OECD’s latest numbers would put China pretty much back to its pre-pandemic growth path. However, they stand in contrast with some recent suggestions that economic growth is slowing more rapidly amidst the turmoil and uncertainty caused by the reining-in of the tech sector and wealthy entrepreneurs under President Xi Jinping’s emerging ‘common prosperity’ drive.

Growth laboured in the second quarter and may prove to have been flat or close to it when the third-quarter GDP figures are published on October 18. Recent high-frequency economic indicators covering August are pointing to a sharp slowdown in retail sales and falling property prices in the wake of last year’s measures to lower the debt levels of real-estate developers. Localised lockdowns to enforce zero-tolerance of Covid-19 transmission will also disrupt growth.

The OECD does note signals of slowing business output in China, including the softening of purchasing managers’ surveys since May, suggesting some moderation in the pace of the recovery, although at levels consistent with continued growth. This softening was reflected in other Asia-Pacific economies but more marked than elsewhere in the world.

At this point, the official growth target of ‘above 6%’ does not appear at risk. However, the critical near-term uncertainty remains the extent to which the Delta variant raises the risks of repeated or persisting lockdowns, with the disruption to domestic demand and supply chains that implies.

China has already seen a broad-based rise in its export prices. This reflects capacity constraints, supply disruptions and rising input costs from higher global commodity prices, half as high as a year ago. Amplified by the tripling of international shipping costs this year, that will weigh on global economic recovery and thus China’s growth.

On the upside, the OECD sees inflation in China moderating this year due to domestic food prices declining more sharply than producer prices are rising. It is forecasting consumer price inflation falling to 1.2% this year, from 2.5% last year, but rising to 2.2% in 2022, although that is 0.2 of a percentage point less than May’s forecast.

As with all economic forecasts, significant uncertainty remains around how the pandemic will evolve, the global pace and spread of vaccinations and containment measures affecting the reopening or closing of economies. In China’s case, there is the added uncertainty of a fragile real estate market and the potential debt crisis lurking behind it.

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OECD Raises China Growth Forecast, Exhorts Structural Change

Screenshot of OECD Economic Outlook 2021 logo

THE OECD HAS revised upwards its projections for China’s GDP growth to 8.5% this year and 5.3% in 2022.

Those numbers compare to the 7.8% and 4.8%, respectively, projected in March, themselves a trim of 0.2% and unchanged, on last December’s projections.

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.

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OECD Trims China Growth Forecast

THE ORGANISATION FOR Economic Co-operation and Development (OECD)—the rich countries’ think tank—has trimmed its forecast for China‘a economic growth this year.

Its latest update to its economic outlook puts GDP growth at 7.8%, 0.2 of a percentage point down from its December forecast. Its 2022 forecast is unchanged at 4.9%. As usual, the OECD’s forecasters take a slightly steelier-eyed view than their counterparts at the IMF or World Bank, but the direction of travel is similar.

Overall, the OECD sees most of the world‘a largest economies recovering from the pandemic this year faster than previously expected. This will pull back some of the export growth that helped China be one of a tiny handful of economies that grew last year.

Government stimulus played an even more important role. Monetary stimulus is already being cut back and the OECD expects fiscal stimulus to be unwound this year, The downside risks to its forecast remain primarily pandemic-related: vaccine rollout hiccups and virus variants lessening vaccine effectiveness with either or both necessitating renewed containment measures.

The OECD also warns, however, of what it puts delicately as a ‘repricing in financial markets’.

That is also a risk even if the baseline forecast holds. Expectations of future inflation are rising globally. China’s rapid rebound has pushed up prices for food and metals. Oil prices, too, have moved towards the top of their recent range. Temporary supply bottlenecks such as shipping and semiconductors are contributing as well.  

However, inflation is low and globally real interest rates remain negative — unlike in the ‘taper tantrum’ in 2013. Central banks are acutely aware this time round of the dangers of losing control of markets. Nonetheless, the People’s Bank of China would be particularly concerned about a sustained rise in interest rates because the pandemic brought a pause to their necessary work of deleveraging the economy.

The work reports presented by both the finance ministry and the National Development and Reform Commission, the top economic planning agency, during the two meetings earlier this month highlighted the priority being given this year to tackling ‘hidden’ local government debt.

Although the OECD’s latest update does not touch on this this, China’s post-pandemic recovery has been unbalanced in that it has been infrastructure investment and export-led with domestic consumption lagging. Righting that wil require addressing structural reforms that the OECD has called for in the past such as improved social protection and a more equitable provision of public services to release savings for consumption.

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OECD Sees China’s Economy Growing Solidly, But Warns On Debt

THE OECD HAS put the worst fears it had for China’s economy in June behind it. In the latest edition of its Economic Outlook, it no longer expects contraction this year. Instead, it forecasts that the economy will expand by 1.8% this year, 8.0% next year and 4.9% in 2022.

That would represent a recovery from the Covid-19 pandemic that remains way ahead of the rest of the world. The OECD sees it being the end of next year before the global economy recovers its pre-pandemic levels. That is a slightly rosier view than the IMF has taken. It sees that point taking longer to arrive.

Nonetheless, the OECD is forecasting 4% growth in 2021 (one-third of which will be accounted for by China) and 3.75% growth the year after on the back of mass vaccination and stimulus from governments and central banks.

The OECD is expecting China to end the year on a robust note, with 5.4% growth in the fourth quarter, compared to the same quarter a year earlier. This is in line with the latest Purchasing Managers Index rising to 54.9 in November, its highest since 2010.

However, the recovery is not inclusive and is unlikely to be sustainable, absent structural reforms. It is debt- and stimulus-funded infrastructure investment along with exports that have underpinned the recovery to date, in the OECD’s view. Domestic consumption is yet to return to pre-pandemic levels:

Even though sales of luxury goods are booming and box office revenues have reached new highs, the lack of a recovery in employment and falling household incomes mean that prospects for a full consumption recovery are not bright….More ambitious structural reforms in the area of social protection, and a more equitable provision of public services, are needed for consumption to rebound.

The OECD cautions that progress in rebalancing the economy has slowed, and significant financial risks remain from shadow banking and elevated corporate sector debt.

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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.

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OECD Raises China Growth Forecast And Risks To It

THE OECD HAS edged up its growth forecast for China this year to 6.7% from the 6.6% it projected in November but holds its 2019 forecast unchanged at 6.4%. The revised numbers are contained in the newly published interim Economic Outlook from the rich countries’ think tank.

Overall, the OECD sees a steady or improving expansion across most G20 economies thanks to the bounce back of trade and private investment, with fiscal stimulus in the United States and Germany providing a boost to short-term growth, while inflationary pressures are subdued. Specifically, on China it says

Growth surprised on the upside in China in 2017, helped by a strong rebound in exports, but is set to soften to just below 6½ per cent by 2019. Macroeconomic and regulatory policies are gradually becoming more restrictive, the working age population is now declining and credit conditions are less expansionary. Regulatory efforts are continuing to reduce financial risks, deal with overcapacity in some sectors and improve environmental quality. Fiscal policy is now broadly neutral, but additional measures could be implemented if output growth were to slow more sharply.

However, the risks to its general forecast all threaten particular vulnerabilities of the Chinese economy: tightening monetary policy in the advanced economies, high debt and asset valuations, and a potentially damaging escalation of trade tensions.

The importance of tackling high debt levels is illustrated in this chart.

Chart of G20 total debt, public and private non-financial sector, as % of GDP, 2001-2017. Source: OECD

The OECD calls on Beijing for policy initiatives to reduce the high level of corporate debt, in particular.

The OECD also makes a point of the importance of safeguarding the rules-based international trading system. China has repeatedly been saying the same thing, if somewhat self-servingly and with itself as the guarantor, since long before the Trump administration announced import tariffs on steel and aluminium. It is likely to echo the call again as the United States readies a Section 301 action on intellectual property rights and technology transfer practices aimed at what the US president has flatly called China’s theft of US technology.

Meanwhile, the Trump administration has reportedly told Beijing that it has to come up with a plan to reduce China’s $375 billion trade surplus with the United States by $100 billion within a year.

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OECD Sees China’s Economy Stabilising But Reform Still Needed

THE OECD QUIETLY prides itself on being the grown-up economic forecaster, eschewing the flash and razzmatazz of the International Monetary Fund or the World Bank for an understated mix of solid economic analysis and policy prescription.

The chapter on China in its latest Economic Outlook fits the bill to a tee: a sparse summary of an economy that is stabilising thanks to earlier policy support, but still needing structural reform if ‘rebalancing’ is to be advanced.

GDP growth for this year is forecast to be one-tenth of a percentage point above the official target of 6.5% and the same below in 2018 — ‘holding up’ despite considerable excess capacity remaining in the industrial sector. Consumption remains robust supported by housing-related purchases, e-commerce and overseas tourism.

While infrastructure investment is being sustained, monetary policy is tightening in response to the risk of financial instability, particularly via the shadow banking sector, and other risks that are mounting. Fiscal policy remains expansionary, however. The headline fiscal deficit will be held at 3% of GDP this year and next, the OECD reckons, but policy lending to prop up growth will also slow the rate of rebalancing.

That will also be slowed by the lack of reform, for example to the social safety net, that is diverting monies that individuals could spend on domestic consumption to precautionary savings. Longer term, the OECD says, corporate deleveraging and working off excess capacity “will be crucial to avoid a sharp slowdown in the future.”

It also quietly but firmly makes the point that longer the debt problem is left unaddressed, the larger it will get, and, by implication, the harder it will be to deal with it.

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OECD Edges Up China Growth Forecasts

THE OECD HAS raised its forecast for China’s GDP growth this year by one-tenth of a percentage point from the 6.4% forecast it made last November. It has also raised its 2018 projection by one-fifth of a percentage point, to 6.3%. The 2017 forecast puts it squarely in line with the new official target of ‘about 6.5%’.

Its nutshell summary is:

Growth in China is expected to edge down further by 2018 as the economy manages a number of necessary transitions, including shifting towards consumption and services, adjustment in several heavy industries, working off excess housing supply and ensuring credit developments are sustainable. Demand is being supported by very expansionary fiscal policy, including via policy banks, which in turn is boosting private investment and trade. Producer price inflation has picked up strongly, but consumer price inflation remains low.

The OECD also notes that the rapid growth of private-sector credit and the relatively high level of indebtedness by historic norms is a key risk. Non-financial companies’ high debt levels provide particular vulnerability to a rapid rise in interest rates or unfavourable demand developments, it says. The report also advocates spending be directed at health and education and directed away from adding to financial risks.

The significant uncertainty about the future direction of trade policy globally is a key theme in the report, which makes the self-evident point that a roll-back of existing trade openness would be costly. Around one in seven jobs in China is linked to participation in global value chains.

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OECD Hacks At Its China Growth Forecast

If the Organization for Economic Co-operation and Development (OECD) has pared its growth forecast for the world economy, then it has a taken a hatchet to that for China. In the latest update to its economic outlook, the OECD now says it expects China’s GDP to grow at 7.8% this year, no faster than in 2012. It has pushed back its forecast for any pick-up in the pace until next year, when it forecasts the economy will expand by 8.4%. In March, it had forecast 8.5% GDP growth this year and 8.9% next.

The OECD forecast is a sharper correction than that just made by the International Monetary Fund, which cut its forecast for this year to 7.75% growth from 8%, citing the overall weakness of the world economy and the effect that was having on China’s exports. The OECD points the finger more at a slowdown in capital formation in the first quarter and swings in inventories. Given China’s own recently published monthly economic indicators the downward revisions by both multilateral institutions is scarcely a surprise, though the scale of the OECD’s cut did raise an eyebrow as it is usually the most bullish on China.

The OECD sees scope for more relaxed fiscal and monetary policy in the second half of the year to stimulate growth as long as inflation stays low, but notes that disinflationary pressures have recently abated. It also recognizes the risks lurking in the property market and in shadow banking. Those limit policymakers’ freedom of action. The organization also calls for a detailed timetable to implement structural economic reforms, notably interest rate deregulation, increased labour market flexibility and land reform.

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