Tag Archives: rebalancing

China’s State-Owned Enterprises Will Take Larger Strategic Role

AS TENDS TO be the case with the IMF’s Article 4 reports on the Chinese economy, there is little that is controversial in the overarching analysis and prescriptions of the latest one, released on January 28.

This is the nub of the report:

China’s recovery is well advanced—but it lacks balance and momentum has slowed, reflecting the rapid withdrawal of fiscal support, lagging consumption amid recurrent COVID-19 outbreaks despite a successful vaccination campaign, and slowing real estate investment following policy efforts to reduce leverage in the property sector.

Regulatory measures targeting the technology sector, intended to enhance competition, consumer privacy, and data governance, have increased policy uncertainty.

China’s climate strategy has begun to take shape with the release of detailed action plans. Productivity growth is declining as decoupling pressures are increasing, while a stalling of key structural reforms and rebalancing are delaying the transition to “high-quality”—balanced, inclusive and green—growth.

If anything caught this Bystander’s eye, it was the report’s comments on state-owned enterprises (SOEs) and the somewhat prickly response from China.

These came in a section on how market participants view the wave of regulatory measures mentioned above as undercutting the role of private enterprises. It raises concerns, the report says, about state intervention using non-market-based measures. At the same time, there has been little or no progress in core areas of market-enhancing reforms, such as removing implicit guarantees for state-owned enterprises.

Indeed, there are signs that SOEs will continue to play a significant role in implementing government priorities going forward—for example, with regard to improving technological self-reliance and implementing the climate agenda.

The report’s view is that China’s slowing productivity growth and market dynamism — the entry of young, innovative firms has declined in recent years — is unlikely to revive without SOE and competitive neutrality reforms. China’s business dynamism has declined since the early 2000s, with the still-large role of SOEs a key factor.

SOEs are, on average, 20% less productive than private firms in the same sector, and the decline in business dynamism is particularly pronounced in industries and regions with large SOE presences.

The role of SOEs in the economy remains significant, the report notes, even as profitability is declining, reflecting SOEs’ contributions to economic stabilization efforts during the crisis and their implicit obligations to help implement state climate goals and increase R&D spending for the development of homegrown technologies.

Restarting SOE reform, the report says, could help close the large productivity gap between SOEs and private firms and potentially raise output by around 4% over the medium to long term.

Overall, the profitability of SOEs is weak, and about one in three make losses. Fiscal risks from SOE debt are rising and exacerbated by often illiquid SOE assets. More profitable SOEs could also boost dividend payments to government budgets to provide further resources to meet pressing social spending needs.

Needed reforms include ending preferential access to credit and implicit guarantees for SOEs to ensure competitive neutrality between private and state-owned firms, and improving SOE governance to limit the potential economic and fiscal costs of weak management and mismanagement.

A gradual and well-communicated approach to reform would be required, especially in regions with weak public finances.

A series of defaults by local SOEs has already created investor uncertainty about state support. However, the government response has been stricter supervision rather than reform.

Chinese authorities agreed with the IMF staff preparing the report that there is a need to deepen reform efforts to counteract a declining trend in productivity growth. They pointed to SOE reforms to improve corporate governance and competition policies to address local protectionism. However, they stressed that external decoupling pressures are adding critical headwinds to productivity growth which, in their view, necessitate an increased role for SOEs in strategic sectors.

Should the SOE-focused R & D strategy fail, that greater role would come with an elevated medium-term risk of a faster decline in productivity growth, especially if technological or financial decoupling increased due to external tensions.

In his formal response to the report, Jin Zhongxia, China’s Executive Director at the Fund, defended the progress made in the three-year (2020-2022) SOE reform plan, claiming 70% of its goals had been achieved by the end of 2021.

Yet he pushed back firmly against the recommendation to phase out ‘implicit guarantees’ to SOEs, claiming they were more perceived than real. He stated that SOEs are separate commercial entities from the government and that there are no implicit guarantees.

Jin also took a swing at the interest and exchange rate policies of ‘major developed countries’ (for which read the United States primarily), which he said provided ‘a blanket subsidy to all their companies’, adding:

Large private companies in some major developed countries can legally lobby and collude with politicians and can enjoy implicit protection and preferential procurement. In addition, China’s companies, both public and private, are victims of unfair competition in the form of technology and supply sanctions and market restrictions under the name of national security.

The words pot, kettle and black come to mind.

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Rate Cuts Highlight Tricky Growth Balance China Has To Strike

Chart showing China's quarterly GDP growth year-on-year from Q1 2019 to Q4 2021

CHINA HAS CUT interest rates for the first time in two years as the property sector debt crisis and a resurgence of Covid-19 weigh on the economy.

Fourth-quarter GDP growth came in at 4.0% year-on-year, its slowest pace of growth in 18 months. Quarter-on-quarter growth was 1.6%, up from the third quarter’s 0.7% but still far from robust.

While both the y-o-y and q-o-q numbers slightly exceeded consensus expectations, they confirm the return to the trend slowdown in growth seen before the distortions of the pandemic.

Year-on-year growth slowed in each quarter last year, although the economy expanded by 8.1% for the full year as it bounced back from 2020’s initial outbreak of Covid-19. The official target for 2021 was ‘over 6%’.

Retail sales rose by only 1.7% in December, much less than forecast, as new Covid-19 outbreaks forced new lockdowns in several cities. Investment also slowed, although industrial output rose.

The interest rate cuts by the People’s Bank of China signals a more assertive monetary approach than the easing already seen in the third quarter with the lowering of banks’ reserve requirement ratios.

Today’s cut in the benchmark one-year loan prime rate by ten basis points to 2.85% and the rate on seven-day reverse repurchase agreements to 2.1% follows December’s five-basis-points cut in the one-year policy loans rate. The five-year loan prime rate, the benchmark rate for mortgages, was left unchanged, but a reduction in that sooner rather than later would not be a surprise.

The reverse repo rate cut is the more unexpected of the latest cuts. It reflects authorities intention to stabilise the economy well ahead of the Party congress later this year when President Xi Jinping will likely be anointed to a third term.

A managed slowing of growth to rebalance the economy is politically tolerable, providing it comes with no social disruption. However, a property sector collapse with widespread developer defaults and the financial and social risk that would bring would not be.

The debt overhang remains serious. Corporate debt was still 156.8% of GDP in the second quarter of 2021. That is down from 163.4% a year earlier but still high enough to complicate the way forward for policymakers aiming to stimulate growth while reducing the economy’s reliance on debt-fuelled infrastructure investment and export-oriented manufacturing.

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Stability Concerns Will Drive China’s Economy in 2022

THE CENTRAL ECONOMIC WORK CONFERENCE that concluded this week does not appear to have brought anything to suggest other than the controlled slowdown of the economy will continue next year with an emphasis on authorities ensuring financial and social stability. 

That implies a continuing effort to ensure that the private sector aligns with the public interest as defined by the Party and that the efforts to wean the economy off its dependence on the property sector will continue in the drive for more consumption-based, sustainable and inclusive growth.

That, in turn, suggests that the regulatory crackdown will persist for some time, notably in non-SOE-dominated technology sectors. The reining-in of anti-competitive and big-data collection power will go on, and capital-market activity will also continue to be tightly if flexibly regulated. That, at least, is this Bystander’s interpretation of the cryptic mention in the Economic Work Conference of the promise of ‘traffic lights for capital’.

Those may all be measures to tackle the long-term headwinds of rebalancing and decoupling. More immediately, while the economy has rebounded from the worst of the pandemic-related disruption in 2020, it has slowed in the second half of this year due to global economic conditions and policy deleveraging, including cooling the property market.

Slowing exports to the United States and the EU in November indicate choppy waters in international trade that could get rougher if the Omicron variant causes a new wave of disruptive infections. 

Nor has the property crisis gone away. Beleaguered developer Evergrande has been declared in restricted default by the credit rating agency Fitch after the expiry of the grace period for a missed international bond payment. 

Authorities have the administrative and financial resources to prevent it from becoming a systemic risk, but the ‘restructuring’ of Evergrande still has to be managed in a way that ends the implicit guarantee of state bailouts for overextended property developers and their investors but does rescue the individuals and families who have bought their properties, built and unbuilt.

As the property sector accounts for 25-20% of GDP, this inevitably cannot be done without slowing growth. The People’s Bank of China has cut the reserve requirement ratio for banks by 50 basis points to an average of 8.4% to boost lending to generate some stimulus. The central bank offset this by repaying liquidity injections through its medium-term lending facility, indicating its concern about the risks of financial instability.

Signalling that stability is a macroeconomic priority suggests that policy in 2022 will be to continue the orderly management of deleveraging and the slowdown in GDP growth. Unemployment and the associated risk of social unrest, rather than GDP targets, are policymakers’ ultimate concerns. Those will determine the extent to which authorities will tolerate slower growth.

This year, the official GDP growth target is 6%, down from 6.0-6.5% in pre-pandemic 2019. The recommendation by the Chinese Academy of Social Sciences (CASS), the country’s leading research institution, that the government lower its 2022 target to 5% — to allow a ‘focus on promoting reforms and innovation and pushing for high-quality development’ — will be reflective of official intent.

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IMF Calls For China To Connect Climate And Rebalancing

Screenshot of IMP Country Page for China, accessed November 22, 2021

THE INTERNATIONAL MONETARY FUND’S most recent annual checkup on the health of China’s economy — more formerly the IMF staff’s 2021 Article IV Mission — carries few surprises.

The summary of the IMF team’s report says China’s recovery is well-advanced but unbalanced.

It also notes that the recovery is slowing because of the rapid withdrawal of policy support and the lagging recovery in consumption amid recurrent COVID-19 outbreaks, with more contagious variants posing challenges.

Recent power outages and a slowdown in real estate investment related to the ongoing policy effort to reduce leverage in the property sector are also weighing on growth. Regulatory tightening targeting technology sectors, while aimed at strengthening competition and data governance, has increased policy uncertainty.

In its October World Economic Outlook, the IMF forecast GDP growth of 8.0% for this year and 5.6% next.

At the same time, the downside risks are accumulating.

Short-term risks include continued pandemic uncertainty, consumption weakness, and elevated financial vulnerabilities. Declining productivity growth, increased decoupling pressures, and a shrinking workforce pose longer-term headwinds to growth.

The prescription will be familiar, too: reduce financial vulnerabilities to protect the recovery; and reaccelerate structural reforms to raise productivity and sustain high-quality long-term growth that is ‘balanced, inclusive and green’.

The Fund also wants to see supportive macroeconomic policies. It recommends that fiscal policy, which has been contractionary this year, should temporarily shift to a neutral stance and focus on strengthening social protection (a long-standing call on the IMF’s part) and promoting green investment over traditional infrastructure spending.

Given subdued core consumer price inflation and still significant economic slack, the Fund also wants monetary policy to be accommodative.

The passage on financial risks also has a familiar ring, even if those are now more urgent:

To safeguard stability, financial risks need to be addressed in a clear and coordinated fashion. Ongoing efforts to address high corporate leverage and phase out implicit guarantees for state-owned enterprises through regulatory strengthening should be accompanied by establishing market-based insolvency and resolution frameworks to safeguard financial stability and facilitate efficient credit reallocation and increase productivity. A comprehensive bank restructuring approach is needed to strengthen the banking system and improve its capacity to support the recovery.

Simultaneous implementation of additional key reforms—including a further opening up of domestic markets, reforming state-owned enterprises, and ensuring competitive neutrality with private firms while promoting green investment and strengthening social protection—will support the transition to high-quality growth.

The report also ties efforts on climate mitigation to economic rebalancing. It says that achieving the 2030 peak carbon and 2060 carbon neutrality goals will be most successful if China combines economic rebalancing towards a more consumption-based growth model with the use of carbon pricing tools, such as an improved national emissions trading scheme.

It also calls on Beijing to green the Belt and Road Initiative and aid the efforts to put low-income countries’ debt on a sustainable footing, including the timely implementation of the G20 Common Framework for debt treatment by all relevant Chinese entities. That is stronger wording on the debt point than in the 2020 Article IV Mission report, almost a rebuke by the standards of these reports.

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China’s Growth Strong Enough For Now To Allow For Structural Change

CHINA’S ECONOMIC GROWTH is slowing. That much we know. The question is whether it is slowing to the point that policymakers run out of headroom for long-term structural change. 

Despite third-quarter GDP growth coming in at 4.9% year-on-year and showing barely any change, a mere 0.2% increase from the April-May quarter, the answer appears to be not yet. 

Monetary, fiscal and regulatory tightening has kept the pace of recovery measured. This has been further dampened by a combination of disruptions to industrial output, which grew by just 3.1% year-on-year in September, the slowest since Covid-19 hit in early 2020. 

The two most severe disruptions have been localised lockdowns to combat Covid-19 outbreaks and power shortages resulting from central government’s orders to provinces and municipalities to cut carbon emissions in support of national commitments to lowering carbon emissions. 

Similarly, the property sector crisis weighed on growth during the quarter. Private and public sector fixed investment slowed, and housing starts fell for six months to September, the longest run of declines since 2015. Home sales were down 16.9% year=-on-yer in September, following August’ 19.7% decline.

Like power shortages, the troubles of Evergrande and other developers, if brought on in large part by their own expansionism, have been triggered now as a result of policy. 

Deleveraging the property sector is a central part of removing financial risk from the system overall. Lowering house prices is a core pillar of President Xi Jinping’s drive to reduce inequality under the rubric of ‘common prosperity’.

Making progress on both goals and keeping full-year growth on track to be well above the ‘about 6%’ official target will make policymakers comfortable enough that they need not change course. 

Growth for 2021 will probably turn out to be 7-8% as it gets a last hurrah base effect from 2020. As the chart above shows, the third-quarter growth rate was pretty much in line with the quarterly growth rate throughout 2019. The economy has long been managed onto a glide path of slowing growth. 

One signal of policymakers’ confidence that they can maintain course was the statement from the People’s Bank of China last Friday that any contagion from Evergrande to the financial system was controllable. It was surely no coincidence that the central bank broke its silence on the Evergrande crisis ahead of the GDP figures being announced.

Another is the publication by Qiushi, the Party’s leading theoretical journal, of Xi’s August 17 speech to the Central Financial and Economic Affairs Commission on common prosperity. 

This puts in the public realm more detail of what is coming to look like the foundational policy for Xi’s third term and the moral and political case for economic rebalancing for China’s next stage of development.

The emphasis on wealth redistribution, which has already seen a crackdown on the country’s tech billionaires, is clear. More affordable homes will be a big part of that, as will be inescapable taxes on the rich. 

Xi does not want to see the collapse of China’s new middle class or risk the social disintegration that could come with it — along with the inevitable challenge to the Party’s legitimacy to monopoly political rule.

None of this is to say that the challenges of managing the growth transition will be easy, and if anything, it is getting more difficult. Beyond the imminent issues of the power crunch and the property market’s woes, the international economic environment is uncertain, with the downside risks increasing, and the domestic recovery remains unbalanced. 

The structural changes needed to promote domestic consumption over savings, the provision of centralised social welfare services and safety nets, and the concomitant changes to a regressive tax system, including the introduction of property taxes, are also significant policy challenges as they hit many vested interests.

China’s demographics are turning unfavourable faster than anticipated, and the middle-income trap is bearing down. Between them, Trump and Covid-19 have cost Beijing precious years in the race for China to get rich before it gets old. What riches it is creating will have to be more widely shared.

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China’s Slowing Economic Growth Is Fine For Now

THE LATEST HIGH-FREQUENCY economic data from the National Bureau of Statistics (NBS) confirms the slowing trend of China’s domestic economy revealed in earlier indicators.

  • Industrial output slowed from 8.3% year-on-year (y-o-y) in June to 6.4% in July, the slowest pace in a year, although high-tech manufacturing grew by 15.6% y-o-y. 
  • Retail sales slowed to 8.5% y-o-y, the slowest growth this year, from more than 12% y-o-y in May and June. Sales of durable and nondurable goods slowed, in-store and online. Services also slowed across both channels. 
  • Fixed investment grew by 10.3% y-o-y in the first seven months of 2021, half the 19.9% pace of the first four months of the year.
  • Urban unemployment was little changed at 5.1% from 5.0% in June. 

As to be expected, the NBS asserts that the economy is continuing its stable recovery post-pandemic, but acknowledged the headwinds, including the resurgence of Covid-19, the recent flooding and the ‘growing external uncertainties’, which could cover a multitude of sins from a slowing global economy as the Delta variant causes a renewed surge of infection in developed markets to deteriorating US-Chinese relations.

The economy remains on track to meet its official goals for 2021, including GDP growth of at least 6.0% this year. Anything more may be a stretch. 

Job creation remains critical. The official target is for some 11 million new urban jobs this year, and the surveyed urban unemployment rate to be around 5.5%.

Hitting this goal is more important than the GDP one. Making progress with rebalancing the economy towards being driven more by domestic consumption and less by exports and infrastructure investment while keeping the private sector aligned with Party goals trumps both.

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IMF Again Ups China Growth Forecast

Screenshot of IMF's World Economic Outlook, April 2021

THE INTERNATIONAL MONETARY FUND has upped its forecast of China’s growth rate this year to 8.4%, an increase of 0.3 percentage points from its January forecast.

The latest number is included in the IMF’s newly published World Economic Outlook. However, the Fund is holding its 2022 forecast unchanged at 5.6%.

For the global economy as a whole, the IMF has raised its forecast to 6% for this year and 4.4% for next, increases of 0.5 and 0.2 percentage points respectively from January’s forecasts.

Beyond 2022, the Fund expects global growth rates to moderate further, in part because China’s growth will be slowed by ‘necessary rebalancing to a sustainable growth path’, with Beijing scaling back the forceful public investment central bank liquidity support that facilitated the early and robust recovery from Covid-19.

However, the IMF expects only a mild tightening in 2021 of last year’s sizeable fiscal expansion, while monetary policy is expected to remain supportive this year and gradually tighten to around neutral in 2022.

Prominent among the downside risks to the forecasts are tensions between the United States and China that remain elevated on numerous fronts, including international trade, intellectual property, and cybersecurity.

The Fund also makes a passing nod to the medium-term demographic challenge that will face China (and others) as its population ages:

Global growth is expected to moderate to 3.3 percent over the medium term—reflecting projected damage to supply potential and forces that predate the pandemic, including aging-related slower labor force growth in advanced economies and some emerging market economies.

The need to clear the middle-income trap is bearing down fast on Beijing.

Update: At the press conference for the IMF’s latest Fiscal Monitor, fund officials repeated the need for structural reform:

Quite importantly, going forward, China can use fiscal policy to facilitate the transformation to a new growth model in China, a model that relies less on investment in public infrastructure, relies more on private consumption and support to households. In that context, strengthening social safety nets in China and reforming the tax system are important opportunities for progress.

Nothing new in the IMF’s line, or much out of line with Beijing’s own long-term plans. The question remains timing.


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Going Too Fast Off-Balance Could Trip China’s Recovery

THE LATEST BATCH of high-frequency economic data from the National Bureau of Statistics raises a couple of red flags about the unbalanced nature of the recovery and a reminder that China cannot get too far ahead of the rest of the world’s steep climb up the cliff of recovery.

Retail sales gained 4.3% year-on-year in October but lagged industrial output, up 6.9% for the same period, while in January-October, private firms invested 0.7% less year-on-year, while state-owned firms invested 4.9% more. Goods imports were down 2.3% year-on-year in January-October. Exports gained 0.4% in January-October, but if the resurgence of COVID-19 cases in the United States and Europe continues, global demand will stall again, and with it, demand for China’s exports,

On the sunny side of the ledger, more than 10 million jobs were created from January to October. This is 1 million more than the annual target, and thus will tilt the balance of the argument about where growth should come from away from more stimulus and towards domestic consumption.

That is the long-term plan for the economy, but the longer short-term recovery remains unbalanced, the more the risk of financial instability grows.

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Jobs Not GDP Are The New Measure of China’s Moderately Prosperous Society

Workers polish escalator parts in Zhejiang,China in 2016. Photo credit: ILO. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License.

THE ABANDONMENT OF a GDP growth target for this year indicates both how uncertain China’s post-pandemic economic prospects look and how job creation and social stability are the Party’s immediate priorities.

Even then, the goal of creating 9 million new urban jobs for this year (and holding the official urban unemployment rate at 6%) could be tough to achieve. It would be the lowest new-jobs target since 2013.

Last year, China added 13.5 million new urban jobs, and that was with GDP growth topping 6%. The Asian Development Bank is forecasting 2.3% growth this year on the assumption that there is a rebound in the second half of the year, an assumption it readily acknowledges that is far from a given. The rebalancing of the economy has not yet reached the point where China is immune to the trends in global trade and the global economy, both of which look to be coronavirus-ravaged for months to come.

More stimulus of the economy is likely to be forthcoming. Prime Minister Li Keqiang’s work report to the National People’s Congress foreshadowed cuts in taxes and fees worth 2.5 trillion yuan ($23.3 billion) for companies and the provision of working capital for viable businesses.

Getting the balance right between reinvigorating the real economy and worsening the country’s debt burden will remain a priority for policymakers. In one sense, eliminating the GDP growth target will help with the debt half of that equation as there will be less pressure on local governments to build the proverbial bridges to nowhere to hit their targets.

Six fronts, six areas

This Bystander expects to hear a lot more frequently about ‘stability on the six fronts and security in the six areas’ — the fronts being employment, the financial sector, foreign trade, foreign investment, domestic investment and expectations, and the areas, job security, basic living needs, operations of market entities, food and energy security, stable industrial and supply chains and the normal functioning of primary-level governments.

“We must focus on maintaining security in the six areas in order to ensure stability on the six fronts”, Li told the NPC.

It is no coincidence that both lists start with jobs. The goal of a moderately prosperous society by this year was tantalisingly within grasp until the pandemic arrived. Lay-offs, hiring freezes and wage cuts and arrears across China as a consequence of the national lockdown to combat Covid-19 are a potential social fissure that authorities have long feared opening up, and thus threatening the social bargain whereby the Party’s monopoly on power is in return for delivering steadily rising living standards for all.

What counts as a rising standard of living is now being recalibrated. Nevertheless, the Party is clear that its priority is not to let the fissure of employment discontent widen.


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Risks Abound In Reversing China’s First-Quarter GDP Contraction

IT IS NO surprise to learn that China’s economy contracted in the first quarter as a result of the coronavirus outbreak. The officially announced GDP figure for January to March of a 6.8% year-on-year contraction is slightly worse than the consensus forecasts of 6.5%. but by no means as bad as some of the darkest forecasts.

It is the first contraction since the National Bureau of Statistics adopted quarterly reporting in 1992, and it negates the 6% expansion reported in the previous set of GDP figures at the end of last year. But so exceptional have been recent circumstances that there is little store to be put in such comparisons.

Retail sales and fixed asset investment both fell 16% in the first quarter as the lockdown took hold. Industrial production and exports all but came to a halt.

The questions for authorities now are what pace of recovery can be generated, what measures are needed to bring that about, and what are the risks in getting it wrong.

There are signs that the country is getting back to work. Factory output in March was down just 1.1% as manufacturing restarted, but, as that figure suggests, it is still well below full capacity. Goods exports fell by 6.6% year-on-year in March in dollar terms, having lost 17.2% year-on-year in January and February together. With the rest of the world still confronting the pandemic, global demand will be weak for some time, offering dull prospects for Chinese exports, although there is also opportunity to grab market share while rivals are incapacitated.

There is political risk in that for Beijing if Chinese companies are seen to be dumping their excess production capacity abroad at rock-bottom prices and taking advantage of still ailing economies elsewhere. The Trump administration in the United States is already on high alert for that, especially in the strategic sectors identified in Made in China 2025. More broadly a resumption of the US-China trade war remains a persistent and unpredictable risk.

Authorities have already put in place fiscal stimulus and kept monetary conditions loose to ensure ample liquidity in the economy so banks can help private businesses stay afloat. The unemployment rate of 5.9% in March, although slightly better than February’s all-time high of 6.2%, shows the need for that.

The risk to social stability in the face of joblessness is a perennial concern for the leadership. The China Labour Bulletin, a non-governmental organisation, has reported protests over wage arrears in various parts of the country this month. Earlier this month, Wuhan market stallholders staged a protest to demand rent relief for the time the lockdown left them unable to operate. Similar demonstrations took place in Hunan province at the end of March.

More are likely. Targetted relief to defuse such pent-up discontent is expected.

Large-scale infrastructure investment is not. Government and corporate debt have increased alarmingly as the pandemic has put on hold the deleveraging campaign that authorities have conducted since 2016. Now many more companies are struggling to refinance their debt. Corporate bond defaults seem sure to increase, especially in retail and leisure, travel and tourism.

Beijing may well have to reinstate the implicit state guarantee temporarily for non-systemically-important firms as it cannot risk a mass of defaults by smaller firms threatening the financial system. China has the capacity, economically and politically, to contain systemic risk, and its semi-isolation from the international financial system limits the spillover possibility.

However, the People’s Bank of China has already said that it will tolerate a small rise in bad loans. ‘Small’ might turn out to be much larger than initially intended.

If there is a silver lining to all this, it is that it may make it easier to achieve the government’s goal of slowing the economy to a sustainable long-term growth rate. The National Bureau of Statistics’ spokesman announcing the first-quarter contraction also said that average annual growth over the next two years was forecast to be about 5%.

That is in line with the Asian Development Bank’s forecast of 2.3% GDP growth for this year as a whole and 7.3% growth in 2021 and probably close to where planners would have liked the economy to be by the end of next year. The trick will be to get there smoothly. 

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