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World Bank Cuts China Forecast As Uneven Recovery Gets Rougher

THE WORLD BANK has trimmed its GDP growth forecast for China this year to 5.0%, 0.4 of a percentage point lower than its previous forecast made in October last year. The Bank says that growth could slow to 4.0% on a worst-case basis.

The new numbers are contained in the Bank’s latest update to its economic forecasts published ahead of its joint Spring meeting with the International Monetary Fund.

The reasons for the growth downgrade are familiar: a spike in Covid-19 infections causing strict lockdowns and disruption of supply chains, continuing strains on overleveraged property developers, the Russian invasion of Ukraine raising commodity prices, and tightening US monetary policy.

The Bank also highlights China’s structural slowdown and regulatory regime change.

It has this to say about China’s approach to containing Covid-19:

Eliminating CoViD-19 infections through a combination of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy.

Despite the changing tradeoffs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and been inoculated with a less effective vaccine.

The Bank estimates that the impact of pursuing zero-COVID will likely be to reduce 2022’s output by about 0.6%.

A longer-term Covid-related question raised by the Bank is whether the interruption caused by the pandemic to the trend decline in China’s share in the final-goods imports of the United States and the rising sourcing of intermediate goods from China by regional countries is temporary or not.

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World Bank Trims China Growth Forecast, Frets About Real Estate

World Bank estimates and forecasts of China's economic growth

THE WORLD BANK has trimmed half a percentage point off its estimate for China’s GDP growth last year and three-tenths of a percentage point off its forecast for this year and remains concerned about the risk of a prolonged downturn in the property market.

In the latest edition of its Global Economic Prospects, the Bank estimates China’s economy grew by 8.0% last year, down from the 8.5% forecast in June 2021. It forecasts 5.1% for 2022, down 5.4%, reflecting the lingering effects of the pandemic and additional regulatory tightening. It is holding its 2023 forecast unchanged at 5.2%.

Its forecast for this year is in line with China’s slowing trend growth.

In its commentary, the Bank says that manufacturing activity has been solid despite supply disruptions and electricity shortages, and export growth has accelerated, even as Covid-induced lockdowns and curbs on the property and financial sectors have restrained consumer spending and residential investment.

For now, macroeconomic policy measures have forestalled a sharper economic slowdown and mitigated financial stress. The People’s Bank of China has reduced reserve requirements, lowered its one-year loan prime rate and implemented significant short-term liquidity injections. The government has accelerated infrastructure investment, supported homeowners and creditworthy developers, and accelerated local government bond issuance.

However, looking ahead into this year, the Bank expects the effects of the pandemic and tighter sector-specific regulations to linger, with policy support only partly offsetting that. It also remains concerned about the possibility of a marked and prolonged downturn in the property sector—and its potential effects on house prices, consumer spending, and local government financing. It describes this as ‘a notable downside risk’ to its forecasts.

In China, financial stress could trigger a disorderly deleveraging of the property sector. Property developers such as China Evergrande have collectively accumulated financial liabilities approaching 30 percent of GDP. Moreover, corporate bonds issued by property developers accounting for a third of the sector’s liabilities have recently been trading at distressed prices. A turbulent deleveraging episode could cause a prolonged downturn in the real estate sector, with significant economy-wide spillovers through lower house prices, reduced household wealth, and plummeting local government revenues. The banking sector—local banks in particular—would be significantly impaired, raising borrowing costs for corporations and households.

Should that come about, the impact would be felt well beyond China. The financial stress would quickly reverberate across the region’s emerging markets and developing economies. The knock-on effect would be the risk of capital inflows suddenly drying up, triggering currency crises, especially in any country dependent on short-term inflows to finance its current account deficit.

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World Bank Sees A Slither Of Growth For China This Year

THE WORLD BANK is forecasting that China’s economy will barely grow this year as a result of the Covid-19 pandemic. In its newly published Global Economic Prospects, the Bank has pencilled in GDP growth of 1% for the year. That would be 4.9 percentage points below its previous projections made in January, and 5.1% lower than 2019’s figure.

The Bank notes that the economy has been gradually getting back to normal in the second quarter following the easing of lockdowns. Its charts indicate the devastation to the economy those caused.

However, the Bank also points out that:

Companies continue to face funding shortages and depressed external demand. The authorities have implemented monetary and fiscal policies to cushion the economic impact of the outbreak. These have included the provision of significant liquidity injections, tax relief, emergency health and welfare spending worth approximately 2.8 percent of GDP, and the authorization of additional special central and local government bond issuances equivalent to about 2.6 per cent of GDP.

Whether those will help the economy hit the Bank’s forecast of 6.9% growth in 2020 will probably turn on when services start to catch up with the recovery seen in the industrial sector and on the pace and extent of the recovery in global demand.

The pandemic has halted international travel and tourism and disrupted global value chains, resulting in a contraction in global trade while domestic lockdowns have plunged many of the countries China’s exporters rely on into recession. The Bank is forecasting 2020 contractions across the advanced economies and just about everywhere else with the exception of East Asia and the Pacific.

Second and subsequent waves of infection remain a wildcard.

Authorities will be more concerned about hitting the ambitious jobs target that has replaced that for annual GDP growth.

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World Bank Sees First Quarter Contraction in China

THE COVID-19 PANDEMIC has caused the World Bank to downgrade its growth projections sharply for the year and it is now expecting China’s economy to grow by just 2.3% this year on a baseline scenario.

The Bank’s ‘lower case’ scenario puts growth for the year at 0.1%. The economy grew by 6.1% in 2019.

As the Bank notes, China has already seen a steep drop in economic activity with high-frequency indicators pointing to a contraction of the economy in the first quarter. That number is due to be released on April 17. The Bank estimates it will fall in a range of minus 0.6% growth to minus 7.5% growth.

It also cautions that that range may be optimistic given the global economic impact of the pandemic spreading around the world.

The pace at which the government can get the economy up and running again will be critical. However, while many large industrial enterprises are starting to get back to work, few are running at anything like full capacity yet. That is even less true for most small and medium-sized firms, who are experiencing an even more fitful return.

The Bank also estimates that fewer people will escape poverty this year as a result of the pandemic. It had previously projected that more than 25 million would do so in China this year but now fears poverty rates will rise for households connected to the retail, tourism and some manufacturing sectors, which have been particularly hard hit by the virus.

Update: A reminder that the purchasing managers index (PMI) compares one month to the previous one, so it is a relative not an absolute indicator of the state of the economy, and that a score of 50 is the dividing line between expansion and contraction. Thus the newly announced rebound in the manufacturing PMI for March to 52 from February’s 35.7 means that the sector is doing marginally better than last month, which was terrible, not that the economy is back to normal, which it is not.

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World Bank Sees China’s Growth Slipping Below 6%

World Bank forecasts for China's GDP growth to 2022. Graphic: China Bystander.

THE WORLD BANK, never a Pangloss among economic forecasters, has scaled back its growth forecasts for China in the newly published edition of its Global Economic Prospects.

It now expects 5.9% GDP growth for this year. If that proves correct, it will be the first time growth will have fallen below 6% in three decades. The forecast is a 0.2 percentage point cut from the one the Bank made last June. It sees growth coming in at 5.8% in 2021, and 5.7% in 2020 as the rebalancing of the economy continues.

There is more to it, of course, that planned structural change and a managed slowdown of the growth rate. Heightened trade tensions with the United States have chilled the global economy, causing Chinese domestic demand to decelerate more than the Bank had previously expected.

The contraction in exports to the United States has tightened, even though, as the Bank puts it, ‘shipments to the rest of the world have been somewhat more resilient’. However, imports weakening more than exports and industrial production falling to multiyear lows point to a broader slowing of domestic demand beyond trade.

Authorities have countered this with more accommodative monetary policy, mainly by cutting bank reserve requirements, even though regulatory tightening to lessen the debt risks in non-bank lending has continued. They have also resorted to fiscal measures, such as tax cuts, and support for accelerated public investment spending at the provincial and municipal government level.

However, the fact that total debt has surpassed 260% of GDP but the share of non-bank lending has continued to decline shows how Beijing is walking a fine line between keeping growth going while still seeking to de-risk the financial sector.

The high and rising stock of private debt in an increasingly complex and interconnected financial system is seen by the Bank to be China’s primary vulnerability:

Rising defaults in local banks or in the shadow banking system, a collapse in property prices, or large capital outflows alongside a sharp adjustment in asset prices could all ripple through the highly leveraged financial system. This risk is only partly mitigated by the country’s low reliance on external financing and ample capacity for fiscal and monetary support.

The Bank also makes a justified nod in the direction of the long-term slowdown in labour productivity (far from a uniquely Chinese problem), but it is the external headwinds that are most buffeting the economy. As the Bank notes:

A permanent and lasting resolution of trade disputes with the United States that builds upon recent progress could bolster China’s growth prospects and reduce reliance on policy support.

True, in as far as it goes, but as the Bank readily admits, the risks remain tilted to the downside.

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Washington Presses World Bank To Lend Less To China Faster

IN ONE SENSE, the United States is kicking at an open door when it calls on the World Bank to reduce its lending to China. The Bank’s blueprint for that over the next five years lays out just such a course. Last month, it signed off on a ‘country partnership framework’ for China covering fiscal years 2020-25, which says:

Given that China is now an upper-middle-income country and above the International Bank for Reconstruction and Development (IBRD) “graduation discussion income” (GDI), this Country Partnership Framework for fiscal years 2020-2025 reorients World Bank Group (WBG) engagement to remain strong yet be increasingly selective as lending declines, with a focus on China’s remaining institutional gaps and the country’s contribution to global public goods.

The framework sets out how increasingly selective lending will work:

Future IBRD lending will primarily focus on China’s remaining gaps in policies and institutions for sustainable IBRD graduation. WBG operations will also emphasize at least one of the following four criteria: addressing regional or global public goods, fostering the private sector, supporting critical services in lagging regions, and strategic piloting of approaches to address key development priorities, especially in areas relevant to other developing countries.

IBRD lending will average about $1 billion-1.5 billion a year and gradually decline during the [framework] period. Borrowing during the previous framework (fiscal years 2013-19) averaged 1.8 billion a year with a peak of $2.42 billion in FY 2017.

China was the fourth-largest borrower from the IBRD over the past decade, behind India, Indonesia and Brazil. The loans mainly go to provinces and municipalities, not central government and are intended to support the structural reform needed as China rebalances its economy towards a more sustainable growth model.

The proposed reduction in the Bank’s lending to China was part of a deal struck last year to get the United States to agree a $13 billion increase in the Bank’s capital. In calling for further cutbacks in the Bank’s lending to China this week, US Treasury Secretary Steven Mnuchin said part of that deal was to get annual lending to China below $1 billion.

However, Mnuchin’s remarks come just a few days ahead of the Trump administration’s December 15 deadline for imposing additional tariffs on some $156 billion worth of Chinese imports to the United States. They seem intended to ratchet up the pressure on Beijing to conclude a ‘phase one’ trade agreement and fit the Trump administration’s tactic of ‘all-points pressure’, and its general distaste for multilateral institutions.

At the same time, anti-China sentiment in the US Congress is hardening. Legislation in support of the protestors in Hong Kong became law earlier this month, and this week the House of Representatives passed a bill that would punish Chinese officials for abuse of Muslims and ethnic minorities in Xinjiang. There are moves afoot, led by the Republican Senator from Iowa, Charles Grassley, to block the World Bank from lending to China at all. That is unlikely to go anywhere but captures the mood in Congress, where there is also concern that a $50 million World Bank education loan to China ended up being used to fund the Xinjiang detention camps (though this allegation remains unsubstantiated).

In addition to the IBRD lending, the World Bank runs an investment program for China through its private financing arm, the International Finance Corp. (IFC). That is expected to remain little changed at $800 million-1.2 billion a year. Its focus will be on strengthening environmental sustainability and resilience, deepening inclusion and reducing inequality in lagging regions, and crowding in private investment to create a more competitive market environment.

Overall the framework for the next five years has as one of its three principal objectives:

Advancing market and fiscal reforms, by improving the environment for competition and private sector development; and achieving more efficient and sustainable subnational fiscal management and infrastructure financing.

That last should have the support of Washington when it is not taking political shots. So should the Bank’s intent also to use its lending to contain debt and manage financial risks. But there is much in the framework’s goals that will be inimical to the Trump administration, notably the attempt to address institutional and governance gaps, and an intent to deliver global public goods in areas such as climate change and marine plastics.

The Trump administration may also be unhappy with the fact that its hand-picked head of the Bank, former US Treasury official David Malpass, has not taken a sword to the Bank’s lending to China as it had wished.

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World Bank Sees China’s GDP Growth Continuing To Decelerate

ECONOMIC GROWTH IS expected to decelerate to 6.2% this year from an estimated 6.5% in 2018, and trend towards 6% thereafter, according to the new edition of the World Bank’s Global Economic Prospects.

The Bank cites weaker exports amidst elevated global trade uncertainty as the main cause of the slow down, although domestic demand is seen as remaining robust as policy boosts consumption. The impact of higher tariffs as a result of the US-China trade dispute, the Bank expects, will be offset by fiscal and monetary stimulus.

The risk is that propping up growth will slow the necessary work of deleveraging the economy.

As the Bank notes:

New regulations on commercial bank exposures to shadow financing, together with stricter provisions for off-budget borrowing by local governments, have slowed credit growth to the non-financial sector. However, in mid- and late 2018, the authorities reiterated their intention to pursue looser macroeconomic policies to counter the potential economic impact of trade disputes with the United States.

Four key charts from the report:

A screenshot of four World Bank charts on China's economy.

And six more:

Six charts from the World Bank Global Economic Prospects report, January 2019

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World Bank Ups Its Prospects For China’s Economy

THE WORLD BANK has become more bullish on China, at least for the near-term. In its newly published annual Global Economic Prospects, it has upped its estimate of GDP growth in 2017 to 6.8% (an 0.3 percentage point increase from its forecast a year ago and reiterated in June) and said it expects 6.4% growth this year (an 0.1 percentage point increase from its previous number).

China benefited, the Bank now says, from the recovery in world trade last year, fiscal stimulus and the rebalancing of the economy, which eased the drivers of the economy away from state-led investment. Inflation rose but was still within target and housing price increases moderated in response to policy measures.

The current account surplus continued to narrow, but the clampdown on capital outflows meant that exchange-rate pressures eased and foreign-exchange reserves recovered modestly.

On the flip side, non-financial sector debt continued to grow, reaching 260% of GDP, regardless of further monetary and regulatory tightening. Credit growth still outpaces nominal GDP growth.

The Bank says that financial sector vulnerabilities — particularly high corporate indebtedness in sectors with overcapacity and deteriorating profitability — are one of the key downside risks to growth.

Others include the possibility of protectionist policies in advanced economies (for which read the United States) and rising geopolitical tensions (for which read mainly North Korea).

The Bank also expects the economy to continue its measured deceleration, averaging 6.3% growth in 2019 and 2020, and less beyond that as adverse demographics kick in over the next decade.

A steeper-than-expected slowdown or debt- or geopolitical-driven financial stress would have impacts well beyond China’s borders.

The Bank’s view is that authorities have substantial ‘policy buffers’ to absorb financial shocks. Nonetheless, it, like others, calls for further structural reform to reallocate economic activity towards more productive sectors.

This would include financial and corporate sector reform as well as greater efforts to deleverage and improve the fiscal sustainability of provincial, municipal and local government.

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Making The Half Empty Glass of Financial Reform Go Away

THAT CHINA’S FINANCIAL system is “unbalanced, repressed, costly to maintain and potentially unstable” will not brook many arguments among policymakers in Beijing. It is, after all, why they are deep into an extensive programme of financial reforms, reforms that are seen as central to the long-term rebalancing of the economy.

It is also why “a weakly regulated shadow banking system” and a tendency of “wasteful investment and over-indebtedness” that is the consequence of a “traditional investment-driven growth model shaped by heavy state intervention” are also being tackled as policy priorities.

However, it is one thing for officials to know that and quite another to have it told to them publicly by the World Bank.

The phrases quoted above were all contained in a section of the Bank’s latest China Economic Update, published mid-week, which called for a quickening of financial-sector reform. The entire section has now been removed from the update, because, the Bank says, “it had not gone through the World Bank’s usual internal review and clearance procedures.”

Whatever, this Bystander is tempted to say. Any red faces at the Bank are probably due as much to the tongue lashing that would have come from Beijing as from the embarrassment of having to redact a section of a report post-publication.

With share prices on the Shanghai exchange in meltdown and the signing ceremony earlier this week setting up the Asian Infrastructure Investment Bank (AIIB), a putative rival to the Bank’s regional clone, the Asian Development Bank, and longer term to the Bretton Woods’ multilateral institutions as a whole, there could be some understandable sensitivity on both sides. Also, China readily takes public offense at any perceived criticism by any institution seen to be in the pockets of the U.S. and the EU — and the World Bank has previous in this regard.

What, to our mind, lies behind this particular spat is that when the International Monetary Fund comes to consider in October whether to endorse the renminbi as an official reserve currency by including it alongside the dollar, sterling, euro and yen in the basket of currencies that comprise its Special Drawing Rights, progress on China’s financial reform — and particularly whether renminbi interest rates are market-based — will be a key criterion.

The IMF reviews the components of its SDRs every five years. It would be an unwelcoming rebuff for China, which is being ever more assertive in claiming its place at international top tables, if it were made to wait until 2020 for inclusion.

As recently as March, Prime Minister Li Keqiang told Christine Lagarde, the IMF’s managing director, that China intended to speed up the financial sector reforms needed to meet the stringent requirements of stability and liquidity demanded of a reserve currency.  With IMF staff preparing their internal assessments for the 2015 SDR review around now, this is not a time when Beijing will brook any public plain-speaking about the pace of financial reform.

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World Bank Adds Its Voice To Those Calling For China To Slow Its Growth

THE WORLD BANK is lending some international credibility to China’s likely switch to a 7% annual GDP growth target next year. In its latest economic update the Bank says 7% growth would not hurt China’s labor market, an indicator watched closely by the leadership in Beijing for any sign of incipient social unrest.

Attempting to sustain the current offical target of 7.5% annual GDP growth hampers the government efforts to rebalance the economy towards being driven by domestic consumption, the Bank says. “The current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.”

In that the Bank echoes the words of the International Monetary Fund. In July the Fund said that Beijing should set a growth target of 6.5%-7% for 2015 and not introduce any stimulus measures unless the economy looked likely to decelerate to a pace below that.

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