People’s Republic of China: 2020 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the People’S Republic of China

2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People's Republic of China

Abstract

2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People's Republic of China

Covid-19 Crisis and Rising External Tensions

1. The COVID-19 crisis has inflicted significant human and economic costs on China, but a strong containment effort has kept the outbreak under control.

  • Human and economic costs were the highest in the first quarter. China was the first country to suffer a COVID-19 outbreak, which took the lives of more than 4,600 people. But the extension of the national Lunar New Year holiday, travel restrictions, and the lockdown of Hubei province (the epicenter of the outbreak), along with other measures, have helped contain the spread of the virus in China even as it has spread globally. Economic activity came to a sudden halt, with GDP contracting by 6.8 percent (y/y) in the first quarter for the first time in more than 40 years.

  • Effective and well-targeted containment efforts have helped the economy go back to work. Containment measures have been calibrated across regions based on specific risk assessments, and the resumption of economic activity has prioritized low-risk regions and essential sectors. With the virus retreating at the national level, the government has successfully adopted a granular and targeted approach in response to localized outbreaks, by combining intensive testing, effective contact tracing, and localized mobility restrictions (Box 1). At the same time, policy support has helped rapidly expand testing capacity and increase production of medical and protective supplies, while digital technologies such as big data and artificial intelligence have been leveraged to facilitate contact tracing and, where still necessary, travel and other restrictions.

China: Local outbreaks since March have been contained

(Daily increase of confirmed Covid-19 cases in China)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: China National Health Commission.Note: Imported cases are not included.

China: Amid pandemic, China’s “Phase 1” U.S. imports rising more slowly than implied by the agreement

(In billions of U.S. Dollar; cumulative amount)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: China Customs and IMF staff calculations.Note: The annual target for 2020 is $219 billion, assuming China keeps its imports of other U.S. goods that are not covered by the “Phase 1” agreement at the 2017 level of $47 billion.

2. The pandemic has taken place as the external environment has become more challenging. The tensions with the U.S. have escalated beyond trade to technology access and financial markets.1 While China and the U.S. remain committed to the “Phase 1” deal, trade data for the first ten months of the year suggest China’s purchases of goods would have to accelerate significantly to meet the purchase commitments. Trade disputes have also emerged elsewhere and concerns about the reliability of global supply chains have prompted some countries to bring production home or reduce reliance on any single trading partner such as China, while rules on inward foreign direct investment (FDI) have been tightened. The European Union is considering whether foreign subsidies distort its internal market, and the resulting regulatory amendments could have consequences for Chinese firms operating abroad.

3. Reforms have continued, but there is still significant room to improve economic resilience. Despite the crisis, important progress has been made, for example, in financial sector opening up. However, reform progress on state-owned enterprises (SOEs) and competitive neutrality has been lagging, contributing to lower productivity and growth. China’s reliance on external demand has declined significantly, but, lacking a strong social safety net, household saving remains excessively high. Financial regulatory strengthening has advanced, but financial vulnerabilities remain elevated. While not closing these reform gaps ahead of the crisis has left China’s economy less resilient than it could have been, pressing ahead with reforms will help secure the recovery, accelerate the return to more balanced growth, and contribute to lowering global imbalances.

Unbalanced Recovery so Far

4. Strong and swift policy actions helped mitigate the economic impact of the crisis and prepare the recovery. Policymakers provided financial relief and fiscal support to protect the most-affected firms while safeguarding financial market stability through liquidity provision to the banking system. The People’s Bank of China (PBC) expanded its re-lending facilities to provide targeted support to manufacturers of medical supplies and daily necessities as well as micro-, small- and medium-sized enterprises (MSMEs). The authorities have allowed banks to avoid classifying troubled loans to epidemic-hit MSMEs as non-performing loans (NPLs), tolerated rising NPLs in heavily impacted regions and sectors, and introduced a repayment moratorium for most MSMEs and other eligible firms until early 2021. For households, the authorities accelerated disbursement of unemployment insurance while extending its coverage to some migrant workers and lengthening the application and benefit period by six months to 18–30 months. The authorities also provided various tax relief measures and waived part of social security contributions by employers to protect employment. Moreover, the government has increased spending on epidemic prevention and control and the national public health emergency management system.

5. With the successful reopening of the economy, fiscal policy has shifted to demand support. Staff estimates that discretionary fiscal measures amount to about 4.7 percent of GDP in 2020, centered on an increase in infrastructure investment, providing an estimated boost of 2.2 percentage points to GDP growth. With automatic stabilizers further increasing spending and lowering revenue, the augmented general government deficit is projected to rise by 5.6 percentage points of GDP to 18.2 percent in 2020.2 Augmented debt is expected to reach 92 percent of GDP—much higher than the EM average of about 64 percent—and continue to rise over the medium term. While debt is high, the public finances benefit from a very advantageous growth-interest rate differential and a high national savings at around 43 percent of GDP, bound to be invested domestically.

6. Monetary policy has been supportive, leaning heavily on non-interest rate instruments.

  • The PBC has lowered various policy rates— in particular, the 7- and 14-day short-term reverse repo rates by 30 basis points and 1-year medium-term lending facility (MLF) rate by 30 basis points—reducing loan rates especially to corporates. However, slow adjustment of deposit rates and capital shortages in smaller banks have constrained some banks’ ability to provide new financing to the private sector (SIP 1).

  • To provide additional support especially to smaller firms, the PBC, in collaboration with other authorities, has deployed a wide range of non-interest rate instruments, including further expanding its re-lending facilities with guidance on lending rates, reducing targeted reserve requirement ratios (RRRs), increasing bank lending targets, expanding credit support by policy banks, subsidizing local banks’ loan repayment moratoria, and introducing a new zero-interest “funding-for-lending” scheme for uncollateralized lending to micro- and small-sized enterprises. These measures, combined with window guidance to steer credit to hard-hit sectors, had a significant positive impact on bank lending as well as corporate and government bond issuance, leading to a rapid credit expansion with total social financing (TSF) growth accelerating to 13.7 percent (y/y) as of October, up from 10.7 percent at end-2019 (Box 2).

China: Monetary policy support included lower policy rates

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; and IMF staff calculations.

7. Following the fast rebound in the second quarter, the economy continued its fast recovery in the third quarter, but growth remains unbalanced.

  • The recovery so far has relied heavily on public support, while private consumption remained weak. Real GDP grew by 4.9 percent (y/y) in the third quarter, following the rebound of 3.2 percent in the second quarter (Box 3). The rapid recovery was driven by the combination of a large increase in government spending, heavy on investment, and the decision to prioritize opening production facilities in the exit from the lockdown. Real estate investment returned to positive growth by the summer, with housing starts outpacing sales. Following the recovery in manufacturing, private investment strengthened around the same time. In contrast, the recovery of private consumption has been much more gradual, reflecting continued social distancing in person-to-person services, a significant drop in the growth of average household income amid still-weak labor market conditions, and the increase in precautionary savings owed, in part, to the still very limited social safety net. Real retail sales are still below their pre-crisis levels and unemployment remains elevated.3

  • Exports have held up well despite the more difficult external environment. While the pandemic and lockdowns significantly compressed global trade overall (Box 4), Chinese firms—supported by an earlier recovery of production—have seen strong demand for medical and protective equipment and work-from-home-related electronics, with demand broadening beyond pandemic-related goods more recently. The value of merchandise exports increased by 0.5 percent (y/y, in USD) in the first 10 months of 2020, despite an estimated decline in volume of 3 percent. On the other hand, the value of merchandise imports declined by 2.3 percent (y/y, in USD) during the same period, reflecting mostly lower commodity prices as import volume increased by an estimated 4 percent. The relatively strong domestic recovery, improved global risk sentiment, and continued financial opening-up have attracted large portfolio inflows since the second quarter.4

China: “V” shaped recovery driven by investment while consumption recovers more slowly

(Real growth in percent year-on-year)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; and IMF staff calculations.

China: Private consumption impacted by falling household income and higher precautionary savings

(Nominal growth in percentage points, 2020 minus 2019)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; NBS Household Survey; and IMF staff calculations.Note: Savings Rate calculated as (1 – household consumption per capita/household disposable income per capita).

China: Export rebound driven by pandemic-related goods

(In percent, year-on-year growth of 3-month sum of USD export value)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; and IMF staff calculations.

8. Core inflation has been subdued, while food price inflation has stabilized. Reflecting a still-large output gap—estimated at around -3½ percent of potential GDP on average for 2020—core CPI inflation, which tends to reflect demand conditions with a lag, remained at 0.5 percent (y/y) in October. Food price inflation, which stayed high due to the lingering effects of the African swine fever and heavy rains and floods in the summer, has recently stabilized, leading to the decline of headline inflation to 0.5 percent in October, below the PBC’s target of 3.5 percent for this year. Producer price inflation has risen gradually in line with the rebound in economic activity but remained in deflationary territory at -2.1 percent (y/y).

9. The credit-driven and investment-heavy recovery could reverse recent progress on rebalancing.

  • Public investment has been the main driver of domestic growth. The pandemic has weakened aggregate private consumption as income dropped especially for the more vulnerable households while the better-to-do increased precautionary savings.5 At the same time, public investment increased significantly, threatening to reverse the progress towards more balanced growth achieved over the last five years. This comes despite the fact that China’s public capital stock of more than 150 percent of GDP—excluding SOEs—is already very large in comparison to both emerging and advanced economies, suggesting diminishing returns from further traditional infrastructure investment.6 Also, SOEs increased their fixed-asset investment strongly in the second quarter, leading the more recent investment recovery by privately-owned enterprises (POEs).

  • Progress toward “greener” growth has been mixed. China remains a world leader in renewable power and electric vehicle deployment. Air quality has also continued to improve, although this was partly due to the lockdowns. However, coal-fired energy capacity, which had declined for several years, began to expand again in 2019, as the opening of several new large-scale plants outpaced the retirement of old and inefficient plants.

  • The pandemic appears to have temporarily staiied external rebalancing (117). While the current account surplus is expected to increase this year, the widening largely reflects the surge in pandemic-related exports, declines in commodity prices, and other effects of the global crisis.

China: SOEs led the recovery in corporate investment

(Nominal growth in percent, year-on-year)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: China National Bureau of Statistics and IMF staff calculations.Note: Public enterprises: Investment in construction and purchase of fixed assets by state owned and controlled enterprises. Private enterprises: Domestic investment in construction and purchase of fixed assets by collective, private, and personal enterprises and institutional units as well as the enterprises controlled by these units.

China: Coal-fired power generation capacity on the rise again

(In gigawat)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Global Coal Plan Tracker; and IMF staff calculations.

10. The pandemic has added to the many interconnected financial vulnerabilities already present before the crisis. While exceptional financial support measures have helped avoid a potential credit crunch (114), they also contributed to a further increase in already very high corporate debt and exacerbated existing structural problems by prolonging the economic life of non-viable and low-productivity firms, including SOEs, particularly in capital-intensive sectors with overcapacity. At the same time, while temporarily masked by eased NPL recognition standards, the pandemic has added to vulnerabilities in the banking sector by reducing the debt-servicing capacity of highly leveraged corporates and households.7 Rising leverage also added to vulnerabilities in parts of the asset management sector as the implementation of the asset management reform was postponed by one year to end-2021. These developments create significant financial risks going forward (see below).

11. Structural reforms have progressed, but not evenly across all key areas (Box 5).

  • The opening of the financial sector has advanced. The negative lists for foreign investment access were shortened further, both nationwide and in Pilot Free Trade Zones; foreign ownership caps on securities, fund management, futures and life insurance companies were removed; and a network clearing license for RMB transaction was approved for a foreign company. Restrictions on the investment quota of foreign institutional investors were also removed. Foreign ownership caps on the commercial vehicle industry were lifted and the ownership limit on some agricultural industries was raised. New overseas investment quotas for domestic institutional investors were granted.

  • Labor market reforms have improved resource allocation. The share of migrant workers in aggregate employment is rising, as reforms have made it easier for migrants to obtain hukou in many large cities. Migrant access to public services, however, remains limited, especially to close-by public schools. In addition, migrant workers who settle in urban areas may be at risk of losing (or may need to give up) their rural land rights, while the lack of efficient land markets in rural areas means that they may not be adequately compensated. These factors make many migrant workers reluctant to acquire urban residency, depriving them of access to social safety nets provided in urban areas.

  • Progress has been made in improving market competition. The patent law was amended to strengthen intellectual property protection and foster innovation. The government has also stepped up its efforts to further regulate monopolistic practices and promote fair competition, including in online business platforms.

  • However, progress in real-sector reform has been slow, especially in the areas of SOEs and competitive neutrality. Progress in SOE deleveraging has reversed as leverage ratios in percent of GDP have further increased during the crisis, while profitability has declined—in part reflecting SOE contributions to economic stabilization efforts. In addition, there was little tangible progress toward much-needed SOE reform. For example, listed SOEs continue to enjoy privileged access to credit and other resources, despite their significantly lower productivity than POEs in the same sector— by about 20 percent as of 2019, measured by total factor revenue productivity (that is, value-added per unit of capital and labor)— driven, in large part, by low capital productivity. Given the overall size of the SOE sector, this comes at a significant cost to aggregate total factor productivity (SIP 2).

China: Productivity gaps between SOEs and POEs remain large

(Productivity gap (POE = 1))

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Listed firms from Wind, authors’ calculations, see Jurzyk and Ruane (2020) for more details.

12. The pandemic has also brought China’s inequality challenges to the fore. Rapid economic growth over the last decades has lifted millions out of poverty. At the same time, income inequality has increased sharply, leaving China more unequal than other countries in the region. Household savings are high but heavily concentrated in high- and middle-income households with little buffers for low-income families.8 Despite the structural shift towards service employment, gender gaps in labor force participation and wages have increased.9 While it is difficult to fully gauge the impact of the crisis, income and wealth inequalities have likely widened as low-income households have faced job losses and wage cuts, with less flexibility to work from home. This dynamic likely contributes to the sluggish recovery in private consumption as low-income households have a higher propensity to consume. This points to a number of institutional weaknesses:

  • Social safety nets remain woefully inadequate despite recent adjustments. In particular, the coverage of the unemployment insurance system is still very limited, providing coverage for only one in three people in the urban labor force and for fewer than one in five migrant workers, with even thinner coverage in rural areas. In the first quarter, only 10 percent of 23 million unemployed workers received benefits.

  • Spending on social assistance and public health care is low. Even taking into account the budgeted increase in spending of RMB 147 billion (0.14 percent of GDP) on the national public health emergency management system, China’s aggregate welfare and health expenditures are only about 3.5 percent of GDP, much less than the average of more than 6 percent of GDP for other emerging market economies.

  • The tax system is less progressive than in many other countries. The value added tax (VAT) and other taxes on goods and services account for about 65 percent of tax revenues in China, compared to about 50 percent in emerging market economies. In contrast, revenues from personal income tax (PIT) contribute only around 5 percent of total revenues, about half the emerging market average of 10 percent. In addition, the labor tax wedge for the lowest earners is very high due to a high minimum social security contribution.10 The 2018 PIT reform raised the taxable income threshold and introduced a wide range of deductions, further narrowing the tax base and reducing the progressivity of the tax system. The absence of a recurrent property tax also contributes to the lack of progressivity.

China: Inequality remains an issue

(Net Gini Index; in Gini points; latest year available; average across the region)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF Income Inequality Database (Gini), and IMF staff calculations.Note: ASEAN = Association of Southeast Asian nations. ASEAN 5 countries are Indonesia, Malaysia, Philippines, Singapore, and Thailand.

China: Social assistance remains inadequate

(In percent, left scale; percent of GDP, right scale)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: World Bank ASPIRE, PovcalNet databases, and IMF staff estimates.Note: Adequacy of benefits is the total transfers received by beneficiaries as a share of the pre-transfer total income in the lowest income quintile of individuals. Coverage is the share of the lowest quintile individuals that receive a social protection benefits. EME=Emerging market economies.

13. Large fiscal imbalances limited the response of local governments to address the pandemic. Local governments in China have a higher share of expenditure responsibilities than in many other countries, and already faced large and growing funding gaps between their own revenue and expenditure even before the pandemic, which were filled through transfers from the central government and other financing sources.11 With the crisis, weaker economic activity and various temporary tax and fee relief measures have added to these funding pressures and constrained many local governments’ ability to cope, limiting the effectiveness of the aggregate fiscal response.

China: Local governments chronically face large funding gaps

(SA fiscal gaps in percent of SA GDP; 4QMA)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC, Haver Analytics, and IMF staff calculations.

Authorities’ Views

14. The authorities concurred that strong policy actions have helped mitigate the impact of the health crisis and supported the recovery. They noted that successful control of local outbreaks was critical for the economic recovery. They stressed the significance of fiscal support, including through transfers to local governments to help vulnerable businesses and households, cuts in taxes and fees, as well as an increase in public investment—partly financed by additional local governments’ bond issuance as well as the first issuance of central government special bonds since the 2009 global financial crisis. They calculated the overall amount of fiscal support as being greater than staff’s estimate of discretionary fiscal support. The authorities saw non-interest rate monetary and financial policy measures such as the PBC-subsidized loan repayment moratoria and zero-interest funding-for-lending scheme for local banks as particularly effective in supporting the most vulnerable MSEs and employment while avoiding potential policy leakages.

15. The authorities pointed out that the recovery has been swift but somewhat uneven. They noted that growth has been gaining speed since late first quarter. Investment and exports have been the main drivers, both posting positive year-on-year growth over the first three quarters. The authorities emphasized that private consumption, which is recovering slowly mostly due to the gradual removal of necessary containment measures, began to pick up notably in August, with the first positive year-on-year growth. Travel, sports, and entertainment activities rebounded strongly during the national holiday in October.

Gradual Handoff to Private Demand

16. GDP is projected to grow 1.9 percent in 2020 and 7.9 percent in 2021. Under the baseline, normalization of economic activity is expected to continue, with private consumption and business investment gradually gathering momentum along with a continued recovery in income. Real estate investment, which supported the recovery this year, is expected to moderate going forward, partly due to the planned introduction of prudential measures. At the same time, the global recovery lifts external demand, with the composition of exports broadening further beyond pandemic-related goods. Fiscal policy is expected to remain broadly neutral while monetary policy remains supportive in 2021 though less than in 2020, with TSF growth slowing down to 12.2 percent (y/y) by end-2021 from 13.7 percent in October 2020. Following a strong rebound in the second quarter in 2020, sequential growth would slow from the second half of 2020 before recovering toward its pre-pandemic trend in the second half of 2021.

17. The baseline is built on the strong assumption that risks remain contained.

  • The pandemic lingers but does not hold back the recovery. The forecast assumes no resurgence of nationwide outbreaks and lockdowns in China and a gradual rollout of effective vaccines and therapies throughout 2021. Until end-2021, some restrictions and voluntary social distancing will continue to dampen person-to-person services activity.

  • External tensions do not escalate. While U.S.-China tensions are expected to continue—including maintaining high bilateral tariffs and some restrictions on technology access—the baseline treats a further escalation as a risk.

China: The U.S.-China economic ties go beyond trade

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Haver, CEIC, and IMF staff calculations.

18. The current account surplus is expected to widen further this year, mostly reflecting the effects of the pandemic.

  • The external position in 2019 was assessed to have remained broadly in line with the level implied by medium-term fundamentals and desirable policies (Appendix I). The current account surplus widened to one percent of GDP in 2019 from 0.2 percent in 2018, driven by weak domestic demand and the shift in trade flows, especially the inventory cycle, in response to expected and realized U.S. tariff hikes. Exchange rate flexibility increased, with much of the RMB depreciation in 2018–19 reflecting the escalation of trade tensions with the U.S.

  • The current account surplus is projected to widen to 1.9 percent of GDP in 2020 before narrowing to below one percent in 2021. The projected temporary increase this year reflects lower commodity prices, the collapse in outbound tourism flows as well as a temporary surge in exports of pandemic-related goods and other products, supported by China’s early recovery of production and significant increases in export prices (¶7).12 This comes in the context of a stronger RMB both in real effective terms and against the U.S. dollar (+3.9 and +3 percent as of October, compared to their 2019 averages), reflecting China’s early recovery and strong portfolio inflows and export performance. FX reserves remained broadly stable, up by $20 billion for the first ten months of 2020 while FX intervention appears limited. On a preliminary basis and adjusting for transitory factors, recent developments suggest a broadly unchanged overall external position in 2020 compared to 2019. However, this assessment is highly uncertain given the lack of full-year data for 2020 and the COVID-19 crisis.13

China: 2018–2019 RMB depreciation in response to escalating trade tensions

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Bloomberg; and IMF staff calculations (reproduced from IMF External Sector Report (2020) Figure 1.2.2.).Note: Day 0 marked the shock. Responses to an impulse of 3 (representing a major tightening) in the measure of trade-barrier related news and 90 percent confidence bands based on Jordà (2005).

19. Overall, the expected domestic recovery will generate positive spillovers for the global economy by boosting trade flows and commodity prices. Staff simulation analysis using the IMF’s G20 model suggests that China’s fiscal stimulus in 2020 will boost global GDP by about 0.6 percentage points cumulatively in 2020 and 2021, of which around one-quarter (0.15 percentage points) is due to outward spillovers. Given the high degree of regional integration, the spillovers are particularly large in Asia but low-income African countries, especially commodity exporters, would benefit as well.

China: Illustrative simulation of 2020 fiscal stimulus

(Percent deviation from baseline)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Note: GIMF simulations of the effects of China’s fiscal policy response to the crisis as detailed in the IMF’s Policy Tracker. The simulation does not take into account other policies and developments in China or elsewhere. AE=advanced economies, EM =emerging markets.

20. The economy is adjusting to the “pandemic normal,” but activity is expected to remain below capacity over the medium term. Technology and the digitalization of services are playing an important role in helping the economy adjust to the pandemic, in particular, in the retail and food services, healthcare, education, and entertainment sectors. Nevertheless, labor market scarring from employment losses, an imbalance of investment towards lower productivity public investment, lower productivity growth associated with the cost of workplace safety and hygiene practices, and the time needed for reallocation of resources across sectors are likely to have a permanent level effect on potential GDP, which will remain below its pre-crisis path. At the same time, the medium- and long-term growth rates of potential output will continue to slow due to gap would be if potential output were to have stayed at its pre-crisis levels.

China: Gradually closing output gap at lower level of potential

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.Note: The output gap without decline in potential captures what the output population aging and slowing aggregate productivity growth. However, even with a lower level of potential GDP, a significant negative output gap of around -1.8 percent of potential GDP is expected in 2021 before closing gradually over the medium term, mostly reflecting the slow recovery of domestic private demand. Against this backdrop, core inflation is expected to remain subdued, leaving CPI inflation in 2021 below the pre-crisis target of about 3 percent.

21. The balance of risks to the growth outlook is still on the downside (Appendix II). Medical advances—for example, a faster-than-expected discovery and distribution of effective vaccines and therapies—would help lift confidence and accelerate the recovery relative to the baseline forecast both domestically and globally. However, there are a number of significant downside risks, including:

  • In the near term, the handoff from public to private demand could falter—for example because of a COVID-19 resurgence or a sudden tightening of financial conditions. There are overlapping scenarios, including: (i) another large domestic outbreak leads to the re-imposition of large-scale mobility restrictions; (ii) consumer and business confidence fails to improve given the lingering threat of the pandemic against the backdrop of still-weak labor market conditions and a perception of stalling SOE and other reforms limiting private business opportunities going forward; and (iii) a sudden tightening of financing conditions— for example because of a disorderly exit from exceptional financial support—which, combined with high private leverage, would further depress household and corporate spending.

  • The external environment could become less supportive along multiple dimensions. This would, for example, be the case, if a further deterioration in economic relations with the U.S. leads to further increases in bilateral tariffs and other obstacles to trade. Over the medium term, binding limitations to China’s access to the international technology frontier—be it because of new trade, FDI, or other restrictions—and resulting decline in knowledge diffusion across borders could lead to technology decoupling and lower productivity growth (Box 6). At the same time, restrictions on financial flows through Chinese financial institutions operating in Hong Kong SAR could adversely affect China as Hong Kong SAR is an important funding and investment platform for Chinese corporates, accounting for about one-third of their total equity financing, two-thirds of offshore bond issuance, and 60 percent of inward and outward direct investment.

  • Climate change could lead to more extreme weather events. Floods, already among the most frequent natural disasters in China, could increase significantly in frequency and severity due to changes in precipitation and temperature caused by climate change. If emissions continue to rise at the current rate, the average share of outdoor working hours lost each year to extreme heat and humidity would increase, negatively affecting GDP growth. Local air pollution, though moderating in recent years, has detrimental effects on human health and weighs on GDP growth through negative impacts on labor productivity.

China: Hong Kong SAR is an important financing platform for Mainland China

(In percent of total)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Bloomberg; and IMF staff calculations.

22. In addition, financial stability risks have increased during the crisis. This reflects rising financial vulnerabilities in nonfinancial corporate, housing, and banking sectors as well as the delay of further progress on financial de-risking.

  • Private sector debt has increased significantly, in particular among corporates. Corporate debt is expected to rise by about 10 percentage points to 127 percent of GDP in 2020, following a decline of roughly the same magnitude over the last three years. Household debt is expected to increase by a more moderate 2 percentage points.

  • Credit quality has likely deteriorated under the repayment moratorium and eased NPL recognition, especially at smaller banks. Reported NPLs and credit provisions of Chinese banks increased by about 18 and 34 percent (y/y), respectively, for the first half of this year while profits declined by about 9 percent.14 Banks’ equity valuations have reached all-time lows despite otherwise elevated stock prices, reflecting market concern about asset quality deterioration. Concerns are especially pronounced for lending to consumers and small businesses, especially once the financial support measures expire. Rising defaults among some financially weaker SOEs could also add to pressure on bank balance sheets.

  • The pressure on small banks has intensified, potentially affecting lending to the corporates they serve. Even before the crisis, weaknesses among small banks had become evident and funding conditions were tightening, with the government intervening in three banks that faced severe solvency problems since mid-2019.15 The pandemic crisis has added further pressures given the small banks’ elevated exposure to the most vulnerable corporate sectors and MSMEs. This, in turn, threatens a downward-spiral where vulnerable banks reduce their lending to already weak non-financial corporates.

  • Financial pressures at some local governments are spilling over to the corporate and banking sector. Official local government debt is rising rapidly, projected to reach 25 percent of GDP by end-2020, while revenues are slowing. These debt burdens appear to be affecting financing conditions for local firms and local government financing vehicles with weak-debt servicing capacity, which may be reliant on backstops from the local authorities. Credit spreads for firms in provinces with financially weaker local governments have widened notably relative to firms in other provinces. Local governments have been authorized to inject RMB 200 billion into local banks funded with new debt, which would deepen financial linkages between local governments, banks, and corporations.

  • A housing market correction or funding pressure in the highly leveraged property sector could pose financial stability risks. A shortfall in private demand could lead to an adjustment in house prices, potentially accelerating a downward spiral. Property developers already entered the COVID-19 crisis with significant leverage, accounting for 12 percent of total corporate debt and significant foreign currency debt through offshore USD bond issuance at end-2019. Funding strains in some highly leveraged developers due to weakening operating conditions or a sudden tightening of financing conditions could lead to a further housing market correction, weighing on the economic recovery and impairing banks’ balance sheet.

China: High and rapidly rising private-sector debt levels

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Haver Analytics; and IMF staff calculations.Note: Corporate debt includes external debt but excludes debt of Local Government Financing Vehicles (LGFVs).

China: Rising bank nonperforming loan ratios, especially for smaller lenders

(In percent of total loans)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; and IMF staff calculations.

China: Sudden housing market correction a tail risk but on the rise

(In percent, 1-year out, 5 percent probability)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Deghi et al (2020); and IMF staff calculations.Note: With 5 percent probability, house price growth one year out is projected to be at or below the level shown in the chart.

Authorities’ Views

23. The authorities broadly agreed on the outlook for growth. They expected the gradual pickup in private consumption to continue as consumer confidence and employment strengthen further, while private investment expands strongly. They expected the output gap to close in 2021, supporting underlying inflation while headline inflation would remain low driven by food prices. The authorities saw the widening current account in 2020 as being affected by certain temporary factors, including the positive results achieved in domestic epidemic prevention and control as well as resumption of economic activities, strong external demand for pandemic-related goods and a significant reduction in outbound travel. They expected that the external position would continue to remain broadly in line with the level implied by medium-term fundamentals and desirable policies in 2021.

24. The authorities were mostly concerned with external risks. They regarded the pandemic as the most prominent risk to the growth outlook in 2021, underscoring the need for global cooperation. They agreed that technological decoupling could harm global supply chains and high-tech industries, with a potential negative impact on productivity. They expected leverage to stabilize in 2021 after a temporary increase in 2020 and saw financial risks as manageable despite an expected modest increase in nonperforming assets in the banking system once exceptional financial support measures are phased out. They agreed on the need to address excessive real estate company debt and noted their proactive approach to curbing risks associated with developers.

Policies to Secure The Recovery and Return to Balanced Growth

25. Continued policy support is needed to secure the recovery, with the policy mix calibrated to strengthen private demand and address financial vulnerabilities. The key elements of this strategy are:

  • Supporting private demand and rebalancing. Fiscal policy should shift from infrastructure spending towards household support and strengthening social safety nets, while the monetary policy stance should remain accommodative to bring inflation back to target on a sustainable basis and prevent excessive tightening of financial conditions.

  • Making policy support more effective. The transmission of macroeconomic policies would benefit from further modernizing the monetary policy framework toward more market-based interest rates, improving the macro-fiscal framework, and strengthening intergovernmental fiscal coordination.

  • Containing financial stability risk. With the recovery on track, exceptional financial and monetary measures should be replaced with proactive efforts to address problem loans and manage financial vulnerabilities by strengthening regulatory and supervisory frameworks.

A. Supporting Growth and Ensuring Financial Stability

26. With continued slack in the economy, fiscal policy should remain moderately expansionary in 2021 before turning to consolidation to preserve fiscal space.

  • Supporting the handover to private demand. A moderately expansionary fiscal stance in 2021, which would require somewhat more fiscal support than currently factored into staff’s forecast, would smooth the transition from the strong support provided in 2020. Specifically, the authorities could aim for a moderate stimulus to offset the gradual improvement in cyclical revenues and keep the headline augmented deficit unchanged.16 Such a policy is consistent with staff’s assessment that China has some fiscal space and would provide insurance against downside risks by helping close the output gap faster and secure the handover from public to private demand.

  • Switching to consolidation once the recovery is complete. Starting in 2022, fiscal policy should turn to consolidation. This is also what is currently assumed in staff’s forecast, resulting in a reduction of the headline augmented deficit from 18.2 percent of GDP in 2020 to about 13¾ percent of GDP by 2025.17 A reduction in off-budget local government investment and tax reforms to broaden the tax base could form the basis for the adjustment. This would help stabilize debt in the longer term while protecting the recovery in the short term (Box 7, Appendix III).

27. Shifting from infrastructure investment towards household support will make fiscal policy more effective and facilitate economic rebalancing. While the long-term growth returns from adding to China’s already large stock of traditional public infrastructure are likely to be significantly lower than in the past, establishing a reliable and effective social safety system that sends transfers to low-income households during economic downturns would provide high-impact support to the recovery. It would also make growth more resilient by reducing the high household savings rate and reinvigorating economic rebalancing towards private consumption over the medium term.

28. A combination of a permanent strengthening of the social safety net with reforms to broaden the tax base and increase progressivity would provide effective household support. This would include:

  • Expanding significantly the coverage of unemployment insurance, particularly for migrant workers. The temporary pandemic-related measures to extend greater financial security to unemployed migrant workers could continue beyond 2020. In addition, the rules governing the portability of unemployment benefits could be significantly simplified to support greater labor market mobility. These efforts would be more effective if complemented with hiring subsidies and programs to reskill workers affected by unemployment.

  • Increasing targeted transfers to low-income households. Local governments have improved the coverage and benefits of the Dibao program which aims to guarantee minimum living standards, extended social assistance programs to cover families affected by the crisis and falling into poverty, and temporarily increased monthly unemployment assistance payments. However, there remains ample scope to further increase transfers to vulnerable low-income households. Means-tested (or, to a lesser extent, categorically targeted) transfers could be provided to the unemployed who do not have unemployment insurance benefits. The benefits and coverage of Dibao program could be expanded, especially in the lower-income regions in line with the authorities’ medium-term objective to strengthen the social assistance program.

  • Further enhancing the public healthcare system. Continued scaling up of healthcare capacity, especially in primary care, will add resiliency in potential future outbreaks.

  • Increasing the progressivity and efficiency of the tax system. Tax reforms could help improve the progressivity of the tax system as well as meet additional financing needs to permanently expand the social safety net. Social security contribution rates and the minimum contribution for low-paid workers should be lowered as those result in very high effective tax rates for the lowest earners. At the same time, the tax-free threshold can be reduced to broaden the tax base.18 In addition, reducing inefficient production taxes (e.g. fees on businesses) and full refunding of VAT excess credits would reduce tax distortions. Current reforms to allocate state equity of SOEs to social security funds should be accelerated to address the shortfalls in some local social security funds.

China: Unemployment insurance coverage remains narrow

(In percent of unemployed as of 2016)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Authorities; and Organization for Economic Co-operation and Development (OECD).

China: 2018 reforms made the tax system less progressive

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: China Ministry of Finance; and IMF staff calculations.

29. Accommodative monetary policy focusing on conventional interest rate-based measures will support the recovery and fiscal policy. (SIP3). It will be important to keep a supportive monetary stance until there are clear signs that private demand has strengthened and CPI inflation has risen to its target on a sustainable basis. To that end, the PBC should focus on conventional interest rate instruments (7-day reverse repo and 1-year MLF) and ensure that short-term interbank rates remain near policy rate levels, including by ensuring sufficient liquidity injections or RRR cuts.19 Use of non-interest rate instruments, such as the large expansion of re-lending facilities and increased targets for bank lending to certain sectors, have helped provide much-needed credit to vulnerable sectors when the normal functioning of financial markets was under threat. However, as the recovery is underway and financial markets have stabilized, potentially distortionary measures such as lending targets and window guidance should be phased out carefully as they could, if in place for a prolonged period, exacerbate credit misallocation and mispricing problems.

30. Exchange rate flexibility continues to be important to facilitate adjustment to the changing external environment. In a set of welcome recent measures, the reserve requirement on FX forward (a CFM20) was reduced to zero from 20 percent and the use of the counter-cyclical adjustment factor in the daily trading band’s central parity formation was phased out. Going forward, further liberalization of portfolio flows for both inflows and outflows would strengthen the role of markets in determining the exchange rate. CFMs should not be used to actively manage the capital flow cycle and substitute for warranted macroeconomic adjustment and exchange rate flexibility. Over the medium term, the CFMs should be gradually phased out in a sequence consistent with greater exchange rate flexibility and other supporting reforms. Publishing information on FX intervention would improve the transparency, credibility and communication of the policy framework.

China: Accommodative monetary policy broadly in line with Taylor rule-implied rates

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.Note: The 7-day interbank repo rate is used as the interest rate, and the economic activity gap (see Box 3) is used as the output gap in the Taylor rule (TR) estimation. Three TRs are used in the calibration: an estimated TR with interest rate smoothing (estimated over 2006Q1–2020Q3), a standard TR with interest rate smoothing and an estimated constant neutral rate r*, and a standard TR with interest rate smoothing and a time-varying neutral rate (estimated based on the model by Pescatori and Turunen (2016)).

31. Steps to contain financial stability risks are urgently needed.

  • Exceptional financial support measures can be phased out as the recovery takes hold. Relaxed NPL recognition standards and repayment moratoria have provided relief to corporates and banks and helped avoid a potential credit crunch. As the recovery gains traction, those measures should be gradually phased out as they run the risk of increasing moral hazard and undoing recent progress in strengthening bank transparency and governance. Banks should be required to disclose information on how loans are being reclassified and restructured to maintain confidence in their financial statements. This can be complemented by quickly adopting the proposed regulation to strengthen NPL recognition, which extends the scope of covered financial assets and expands the classification of nonperforming assets.

  • Regulatory and supervisory frameworks need to be strengthened. A number of areas deserve attention: (i) the proposed amendments to the Central Bank Law usefully aim to strengthen the macroprudential policy framework and coordinate supervision of systemically important financial institutions; (ii) the recent efforts to strengthen regulations for online lending and financial holding companies can help contain stability risks amid rapid shifts in business models driven by the fintech sector; (iii) implementing without further delay the planned asset management reform, improving supervisory capacity to monitor risks across the financial system, and strengthening prudential policies to address governance and related-party exposure risks at financial institutions would help safeguard financial stability. In that context, the recently announced prudential measures targeting excessive growth in developers’ interest-bearing liabilities can help contain macro-financial risks from the real estate market; and (iv) there is also room to further increase use of equity financing while curbing excessive speculation particularly in small capitalization stocks, including by strengthening and expanding the registration-based IPO system. Progress along these lines would also help guard against potential risks arising from further liberalization of the financial sector and capital account.

  • The authorities should continue their efforts to address weaknesses in the anti-money laundering and countering-financing of terrorism (AML/CFT) framework. The Financial Action Task Force (FATF) noted progress in technical compliance in its first enhanced follow-up report (October 2020). Further efforts are needed to increase the transparency of beneficial owners of legal entities operating in China (also an anti-corruption measure), introduce a comprehensive legal framework to implement UN-based targeted financial sanctions requirements, and improve financial sector supervision and preventive measures (e.g., customer due diligence and politically exposed persons).

32. A comprehensive bank restructuring approach is needed to strengthen the banking system and improve its capacity to support the recovery. A comprehensive solution to clean up weak banks while addressing moral hazard is critical to address vulnerabilities in the banking sector as exceptional policy support is phased out. The introduction of aspects of a bank resolution framework in the proposed amendments to the Commercial Banking Law is a welcome step. Key considerations for a bank restructuring agenda include:

  • Ensuring adequate capital and liquidity buffers. Supervisors should ensure that banks properly recognize both legacy and emerging problem loans after the expiration of the repayment moratoria and hold adequate capital and liquidity buffers; those that cannot do so should be required to submit credible recovery plans. Efforts to improve bank governance and risk management would also help enable banks to raise capital from markets.

  • Prioritizing common equity in bank capital. The authorities should promptly address low levels of Common Equity Tier 1 (CET1) capital in small banks, which are constraining their capacity to provide credit. Such efforts, including recapitalization (see below), could be complemented by providing tax incentives (“Allowance for Corporate Equity”) and addressing governance constraints that discourage banks from issuing equity below book value. This approach is preferable to alternative plans that emphasize other types of capital that absorb losses only in severe stress scenarios. For example, the planned use of the proceeds of local government bond issuance for bank recapitalization may be precluded from directly investing in CET1. Increasing bank capital via perpetual bonds typically held by institutional investors (e.g. insurers and asset management products) would increase financial interconnectedness and contagion risk during periods of stress. The same concerns apply to other forms of cross-bank capital support such as forced mergers.

  • Establishing a nationwide bank resolution regime in line with international standards. This would help enhance the authorities’ capacity to require recognition of losses and quickly wind down failing banks, while protecting insured depositors and minimizing financial stability risks by preserving banks’ critical functions and transferring good assets to bridge banks or healthy institutions. Non-viable banks should exit with shareholders and creditors bearing losses in accordance with a clearly established hierarchy of claims. Depositors should be protected up to the coverage limit using deposit insurance.

  • Establishing a temporary resolution fund. The closure of failing banks and the timely imposition of losses on shareholders and creditors as part of a resolution regime should be a precondition for continued reliance on the use of public funds. Once a resolution regime is in place, a temporary and fiscally backed centralized resolution fund could be established to complement the deposit insurance mechanism and support the orderly exit of non-viable banks as implicit guarantees for bank creditors are phased out. With appropriate safeguards to minimize moral hazard and avoid the continuation of non-viable operations as well as a mechanism to recover any losses from the industry over time, the fund would support orderly resolution, including by contributing resources to asset and liability transfers and injecting capital into bridge banks.

  • The use of public funds for recapitalization purposes should be a last resort, only used if financial stability is severely threatened, and subject to strict conditions and restructuring requirements that reinforce market discipline and protect taxpayers.

  • Developing a well-functioning distressed debt market. Given that corporate stresses and non-performing assets in the banking system are on the rise, encouraging banks to recognize and dispose bad assets in a timely manner would help expand further a market for distressed debt. Active markets to unload converted equity will help incentivize banks to increase use of debt-equity swaps.

China: Banks’ Common Equity Tier 1 (CET1) ratio is low, especially for small banks

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Standard & Poors Market Intelligence; and IMF staff calculations.

33. Corporate support measures should be gradually replaced by policies to help corporate restructuring and the reallocation of labor and capital to viable firms.

  • A market-based corporate restructuring framework would facilitate deleveraging and exit of non-viable firms. The framework should be comprehensive and include triage of insolvent firms and loss recognition and burden sharing within the general corporate insolvency framework. Improving the legal insolvency and debt enforcement framework in tandem would help address problems of creditor coordination, incomplete contracts, and asymmetric information, helping reduce excessive indebtedness in an orderly fashion. Public credit guarantees could help refinance working capital of viable firms and improve credit supply for POEs more generally.

  • Financing support to SMEs could be provided in a market-friendly manner. Fiscal funding for the recently expanded national credit guarantee fund or for SME loan securitization could provide credit to SMEs while minimizing distortions to credit allocation and risk pricing. To support viable SMEs while maintaining upside gains for using public funds, the government could, for example, provide grants in return for a temporarily higher future corporate tax rate. Facilitating access to risk capital for existing firms and startups by eliminating the tax bias against equity and simplifying regulations of launching startups, would also help speed up the reallocation of resources into growth sectors.21

Authorities’ Views

34. The authorities stressed the importance of sustainable fiscal policies, balancing the fiscal risk from higher public debt against the need to support growth. Public investment and policy support will continue for employment and new businesses in 2021, while the expiration of tax and fee reduction measures will improve overall revenues. They agreed on the need to further improve the public healthcare system and enhance the social safety net to discourage excessive precautionary savings and stimulate greater private consumption. In particular, they plan to reform the unemployment system, which was established in 1999, to better meet the needs of the evolving Chinese economy, including through greater coordination between central and provincial governments, benefit portability, simple application procedures, and skill training. The authorities continued to disagree with staff’s augmented concept, noting that under the 2014 Budget Law, local governments did not bear legal responsibility for the financial obligations of market entities such as SOEs. The authorities stressed that the fiscal risks still remained low as general budgetary debt is well below the average for emerging market economies and that local governments’ debt carrying capacity remains above globally accepted thresholds. They saw economic growth as the key to mitigating risks from debt.

35. The authorities remained committed to prudent monetary policy which balances support for the recovery with concerns for financial stability risks. Monetary policy will use conventional instruments, keep a normal, upward-sloping yield curve, as well as create an appropriate liquidity environment for government bond issuance. Some non-interest rate policies will be phased out, while support for smaller firms will be maintained and improved to provide targeted support for viable firms and employment. The authorities saw the lower lending rate as important to help bring down corporate borrowing costs while keeping banks’ profit margins within a range seen as reasonable. The authorities viewed that more provisioning supported by capital replenishment and reduced dividend payouts would help banks dispose expected higher nonperforming assets next year. They agreed with the importance of continued efforts to improve financial sector governance and shadow banking supervision. They also reiterated their commitment to increasing exchange rate flexibility. The authorities considered the reserve requirement on FX forwards a macroprudential measure to prevent exchange rate overshooting and emphasized that the PBC has stopped regular FX interventions. They also noted that China’s disclosure of FX data is in accordance with the IMF’s Special Data Dissemination Standard as indicated by IMF’s annual observance reports.

36. The authorities are seeking to build on their initial achievements in dealing with weak financial institutions. The authorities emphasized that they have addressed problems in several high-risk institutions in recent years and will continue to follow an approach based on market principles and the rule of law to address weak banks. They expressed concerns that establishing a temporary fiscal backstop for resolution funding may amplify moral hazard. They noted that capital replenishment efforts will be prioritized for financial institutions capable of sustaining market-oriented operations after shareholders bear losses, while unsustainable institutions will be subject to market exit.

B. Maximizing Policy Space by Improving Policy Transmission

37. The monetary policy framework can be further modernized to strengthen the effectiveness of interest-rate transmission. The PBC has reformed the loan prime rate (LPR) framework to make bank loan rates more responsive to policy rate changes by re-benchmarking the LPR on the one-year MLF rate and making all new and existing loan rates linked to the LPR. Additional reforms, such as phasing out interest rate guidance for deposits and inclusive lending, would ease regulatory distortions and strengthen market-based pricing. This would increase the pass-through of policy rate cuts to bank funding costs, supporting banks’ ability to provide new financing. These reforms would also expand credit supply to riskier borrowers such as smaller POEs, reduce the need for potentially distortive directed lending policies, and lower financial stability risks. In addition, the bond and FX derivatives markets can be further developed to increase policy transmission to longer-term bond yields and facilitate a more flexible exchange rate with appropriate FX risk hedging instruments.22

38. Establishing a macro-fiscal framework can further improve fiscal policy transmission. Such a framework would help assess the effectiveness of fiscal policy given the state of the recovery in the short term and anchor market confidence that public finances are sustainable over the medium term.

  • A medium-term macro-fiscal framework should be comprehensive. It should include: (i) fiscal policy targets consistent with fiscal sustainability and macroeconomic stability; (ii) top-down medium-term macroeconomic and fiscal forecasting; (iii) a bottom-up “baseline” expenditure forecasting methodology; and (iv) a strategic decision-making phase in the budget process to decide on the use of the available fiscal space. A fiscal framework should consider the entire general government and publish reports on general government operations (covering revenues, expenditure, and financing) on a monthly basis. The new requirement that provinces and ministries submit three-year budget plans and the development of a framework for the preparation of government financial reports and its implementation through a pilot exercise in 2020 are positive steps. Moreover, efforts need to continue strengthening macro-fiscal coordination including through the fiscal policy unit in the Ministry of Finance.

  • Further enhancing transparency around fiscal actions will bolster market confidence, increase the efficiency of public investment, and support anti-corruption efforts. This requires controlling, tracking, and auditing the implementation of policy measures, providing sufficient information to the public by publishing general government accounts and balance sheets, providing information on quasi-fiscal operations of the SOEs and extrabudgetary funds, preparing a fiscal risk statement, and improving the framework for non-tax revenues, especially for revenue related to land sales.23 Moving in that direction, the new regulation governing the implementation of the Budget Law adds more discipline to the budgeting and financial reporting process. The coverage should be further expanded to include quasi-fiscal activities to ensure the effective use of valuable public resources.

China: Off-budget quasi-fiscal activities have increased significantly

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; and IMF staff calculations.

39. The intergovernmental coordination framework could be strengthened to increase the effectiveness of fiscal policy and enhance fiscal risk sharing across provinces. Providing more fiscal support to the most affected regions helps spread the burden of economic shocks and maximizes the growth impact of fiscal policy at the national level, as multipliers tend to be higher where output gaps are the largest. Key reform considerations include: (i) establishing an automatic and non-regressive fiscal transfer mechanism for the total transfers to each province; (ii) reducing the long-standing misalignment of central-local fiscal responsibilities; and (iii) removing local protectionism—particularly in the form of prohibition of interregional circulation of certain goods and services and designation of service providers—and the remaining hukou restrictions to help firms and households adjust to future idiosyncratic shocks (SIP 4).

40. Digital technologies can help further improve the transmission of policy support to vulnerable households and firms.

  • The authorities can further leverage digital technologies to deliver government support more effectively. Recent efforts to distribute consumption vouchers through Fintech platforms (RMB 60 billion by end-June) and allow online applications for unemployment benefits have shown potential to improve the effectiveness of consumption support and social assistance programs. Digital technologies can also enhance transparency of delivery.

  • Fintech could be more actively used to provide targeted support for small firms and foster an inclusive recovery. Support policies using Fintech lending platforms and online banks promise better targeting as these platforms have unique access to small- and micro-sized borrowers. Behavioral big data could allow Fintech firms to adjust lending terms more smoothly in response to the business cycle, potentially better protecting both lenders and borrowers from collateral deterioration against an unexpected negative shock.24 There is evidence that Fintech has contributed to more inclusive income growth across regions and income groups, suggesting that policy support using Fintech platforms might also help address income inequality in the wake of the pandemic.25 Strengthening regulatory and supervisory frameworks can help address potential risks from Fintech, including risks to financial stability and integrity, and challenges for data governance.

  • The PBC’s central bank digital currency, named e-CNY, can promote financial inclusion and payment efficiency. The e-CNY is currently being tested across several regions and electronic payment platforms (Box 8). Its use could potentially strengthen monetary policy transmission by increasing financial inclusion, help the targeted delivery of fiscal support, and increase transparency in public finances. The PBC needs to carefully monitor and assess operational risks from potential disruptions and cyberattacks.

Authorities’ Views

41. The authorities stressed that policy transmission has strengthened since the LPR reform and broadly agreed on the potential benefits and risks of the e-CNY. They highlighted that the LPR reform has not only ensured more immediate pass-through from policy rate to lending rates, increasing available credit for smaller firms, but also led to lower deposit rates by some large banks. The authorities did not see the self-regulatory mechanism of deposit rates as preventing banks from cutting deposit rates and noted that the benchmark deposit rate prevents disorderly competition for deposits. The authorities emphasized the domestic purpose of the e-CNY, noting that international coordination is important before potential cross-border use in the future.

42. The authorities noted that recent reforms have improved the effectiveness of fiscal policy and clarified that the existing intergovernmental fiscal transfer system already has some automatic and non-regressive features. They noted that the substantial shortening of transfer disbursement periods from the central governments to city governments as well as the introduction of applications for unemployment benefits and employment subsidies through online service platforms have helped provide more timely financial support to vulnerable households and enterprises during the pandemic. The authorities highlighted that part of the existing transfers from the central to local governments automatically move resources to fiscally weaker regions. They also saw local governments’ expenditure responsibilities as broadly matching their fiscal capacity once local governments’ portion in shared taxes, tax refunds and fiscal transfers are included. The authorities agreed that local protectionism should be further removed, including by strengthening the enforcement of the Anti-Monopoly Law and existing regulations, to promote a unified domestic product market.

C. Adjusting Macroeconomic Policy to the Pace of the Recovery

43. Macroeconomic policy will have to step up should the recovery fall short of the current baseline forecast. A deeper and prolonged economic downturn would take a more significant toll on low-income households, suggesting that additional support should primarily focus on increasing social assistance spending and other measures to protect the most vulnerable. Accelerating certain structural reforms that strengthen the role of markets, increase competition, and foster openness would further support growth and make the macroeconomic policy actions more effective (see next section).

  • Any additional fiscal expansion should be on-budget, centrally financed, and focused on low-income households, public health, and social safety nets. Revenue measures could include: (i) removal of minimum social security contribution for low-paid workers; (ii) additional fee cuts; and (iii) an extension of tax relief and waived social security contributions. Contributions to the housing fund could be temporarily waived. On the expenditure side, (i) unemployment insurance benefits could be temporarily increased and (ii) wage subsidies could be considered for migrant workers, who fall outside social protection schemes.26

  • More forceful monetary easing should focus on policy rate cuts. Rapid implementation of the deposit and lending rate reform and addressing weak banks would amplify the impact of further rate cuts. In a severe scenario, if the recovery is delayed and inflation falls significantly below the baseline while financial conditions tighten amidst large fiscal deficits, the PBC could consider deploying a well-communicated market-based policy combining multiple non-distortionary measures (e.g. interest rate cuts, open market operations, or forward guidance). If further exceptional financial support measures were necessary, banks should be encouraged to expand bilateral restructuring efforts with viable borrowers and make use of capital and liquidity buffers, while SME credit support should be provided in a market-friendly manner (¶33). Contingency plans should be prepared to limit the repercussions from potential external sanctions against financial institutions operating in Hong Kong SAR.

  • The exchange rate should remain flexible. In the case of persistent foreign exchange market pressures leading to herding and financial system stress, foreign exchange intervention should be used to counter disorderly market conditions if necessary, while tightening existing CFMs (in line with the IMF’s Institutional View) in a transparent and temporary manner could be appropriate as part of a broader policy package to stabilize the economy and markets.

44. On the other hand, policy support could be scaled back should economic activity recover faster than expected. This would include accelerating fiscal consolidation—for example, additional consolidation measures that lower the augmented deficit by an annual average of one percentage point of GDP starting in 2022 would stabilize the augmented debt-to-GDP ratio by around 2025. This could be achieved by decreasing off-budget local government infrastructure spending and accelerating tax reform such as the reduction of tax-free thresholds for PIT and the implementation of a nationwide recurrent property tax. Monetary policy would need to stay put or tighten moderately in line with the pace of recovery and inflation development, while avoiding an abrupt tightening of financial conditions. Financial regulatory reform should resume more quickly, including by accelerating the asset management reform, to support deleveraging and financial de-risking.

Authorities’ Views

45. The authorities concurred that macroeconomic policy should be adjusted to the pace of the recovery. Should the recovery fall short, monetary support would keep liquidity at an appropriate and adequate level and ensure supportive financial conditions. Meanwhile, fiscal policy would be conditioned on economic situations, enhance the countercyclical adjustment, and play a key role in stabilizing the economy. A stronger-than-expected recovery would call for accelerating fiscal consolidation and a quicker resumption of financial regulatory reforms, with monetary policy adjusting based on inflation and financial stability considerations.

Inclusive, Green, and High-Quality Growth

A. Re-Accelerating Reforms to Support Balanced Growth

46. Simultaneous implementation of key reforms would complement macro stimulus and help promote a job-rich and balanced recovery.

  • Simultaneous implementation of key reforms—such as further opening up domestic markets, strengthening social safety nets, and SOE reform while ensuring competitive neutrality and promoting green investment—can support a job-rich and balanced recovery in the near term. Many of these reforms are mutually reinforcing, suggesting simultaneous implementation would maximize their impact and limit short-term adverse effects. Given the current pressures on the labor market, accelerating the opening up of domestic product markets (in particular in the service sector) while strengthening social safety nets would help protect workers while providing new employment opportunities. Such reforms can help absorb possible employment losses arising from corporate restructuring and SOE reform—measures that, in turn, will raise productivity and anchor growth going forward. This will also help reduce external imbalances and enhance the effectiveness of policies to address shocks. Additional revenues from carbon pricing policies or other climate change mitigation measures (see below) can be used to finance a permanent expansion of the social safety nets.

  • Longer term, these reforms will anchor domestic growth and help build a more resilient, green, and inclusive economy, in line with the authorities’ development goal of strengthening “dual circulation” (Box 9).27

Strengthening Social Safety Nets and Hukou Reform

47. Strengthening social safety nets and accelerating hukou and land reforms will improve labor market mobility and adjustment to the pandemic and its aftermath. Urbanization has helped rural workers to find work in economically active regions, where household incomes are twice as high as in rural areas. A more holistic reform to further improve the hukou system, preserve migrant worker land ownership rights, improve the efficiency of rural land markets, and increase spending on public services and social safety nets, would facilitate labor market mobility and raise growth.

Market and SOE Reform

48. A larger role of markets and easing market entry by new firms would help further narrow productivity gaps from the global frontier. China has seen remarkable growth over the last decades, but with average sectoral productivity at about one third of the global frontier, there is ample opportunity for more. Productivity gaps are especially large in the services sector—for example, business services productivity stands at only 17 percent of the frontier level, owing in part to high entry barriers.28 Reforms addressing these gaps include further opening up non-strategic sectors such as services to the entry of new private firms—both domestic and foreign. Removing regional regulatory barriers will also help increase competition and improve factor allocation by facilitating firm entry and mobility across regions in all sectors. Such reforms would have dynamic gains, boosting domestic innovation and technological upgrading in response to economic changes brought about by the pandemic.

China: Still large gaps to global productivity frontier

(In percent of the frontier level)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: World KLEMS Database and China’s National Bureau of Statistics.

49. SOE reforms would significantly lift productivity and growth. Firm-level performance varies across many characteristics, but one important factor is ownership. Although many SOEs are performing well, private firms are generally more productive than SOEs and, even among listed firms, the average productivity gap between SOEs and private enterprises across sectors in China is about 20 percent. These productivity gaps have significant implications for the level of GDP considering the SOE sector’s dominance in the use of resources. Staff analysis suggests that reforms closing productivity gaps between SOEs and POEs across sectors could raise output by around 4 percent over the medium to long term. Key elements of SOE reforms include:

  • Implicit guarantees should be removed to ensure competitive neutrality in financing between SOEs and POEs. This will require a comprehensive and well-sequenced approach, including more defaults of SOE and LGFV bonds if market forces warrant, in line with the plan of the National Development Reform Committee (July 2019).29

  • SOE governance should be further improved. SOE reforms should be accelerated to ensure that the potential economic and fiscal costs arising from weak governance and mismanagement, such as contingent liabilities, resource misallocation, and distorted market competition, do not outweigh social, political and strategic benefits. SOE governance and transparency should be improved in line with the 2015 OECD guidelines on corporate governance of SOEs.

China: SOEs dominate resource use and operate less efficiently than private firms

(In percent of total)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Jahan et al (2019); Standard & Poors; and Bloomberg.Note: Size of the bubble denotes the entity's total debt. Shaded area shows corporates that have a higher credit rating than their stand-alone credit profile.

China: Implicit guarantees provide credit advantages to SOEs

(Rating score)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Jahan et al (2019); Standard & Poors; and Bloomberg.Note: Size of the bubble denotes the entity’s total debt. Shaded area shows corporates that have a higher credit rating than their stand-alone credit profile.

Personal Insolvency Regime Reform

50. Establishing a personal insolvency regime would help address over-indebtedness of small entrepreneurs and households, supporting adjustment in the aftermath of the pandemic. If carefully designed to minimize moral hazard, a personal insolvency regime would provide a second chance to honest but unfortunate debtors, including those unable to repay due to external circumstances beyond their control such as the COVID-19 shock. Discharge of debt under certain conditions will facilitate the return of overly indebted individuals to the economy and promote entrepreneurship.

Fostering Innovation and Green Investment

51. Government support for basic R&D and innovation, if prudently deployed to limit interfering with markets, can help foster innovation and boost productivity. While market forces in general are more effective in promoting technological advances and growth, in some cases, subsidies and other forms of government support for basic R&D and technological innovation can address market failures which lead to underinvestment in R&D—for example, the presence of very large knowledge spillovers. To minimize distortionary effects of government support, the authorities should look to foster competition, maintain a level playing field among firms, and provide room for young and productive firms to grow. Such policies should be transparent (including how they add to existing subsidy schemes), incorporate strong governance, and be timebound to avoid excess capacity and “zombie” firms. In contrast, industrial policies such as providing subsidies for utilities and land acquisitions should be avoided as they are generally distortionary and could amplify productivity gaps vis-à-vis the private sector when they favor SOEs.

52. Green investment and well-sequenced climate change mitigation strategies would not only boost the recovery but also carry large environmental, health, and economic benefits.

  • Green investment would support the recovery. Public investment in climate-resilient infrastructure and the transition to a lower-carbon future (e.g., clean transport) can support job creation while increasing economic and environmental resiliency. Public works during the recovery—including in those provinces adversely affected by flooding this summer—could facilitate poverty reduction through green jobs, such as reforestation, soil and water conservation, and flood protection. Tax relief and fiscal incentives for low emissions vehicles should continue.

  • Strong policy measures are needed to achieve China’s ambitious goals in the longer term. President Xi’s recent announcement that China will strive for CO2 emissions to peak before 2030 and achieve carbon neutrality by 2060 is a big step towards slowing global warming, but at the same time requires a significant transformation and strengthening of existing green policies. The authorities have started working on detailed plans, including through setting carbon intensity targets, active advocacy and promotion of green consumption, the rollout of carbon capture and sequestration programs, and the construction of a modern environmental governance system. Low oil prices also present a good opportunity to further improve carbon pricing to incentivize firms and households to switch to low-carbon activities and energy sources. The national emission trading system for the power sector should be implemented as soon as possible—preferably by the end of this year as currently scheduled—and further strengthened by making energy efficiency standards more stringent and increasing carbon prices gradually.30 New carbon pricing policies for non-covered sectors should also be developed. The majority of carbon revenues can go towards funding social safety nets and cuts in distortive taxes. This should be done in an equitable way to offset the negative macroeconomic and distributional effects of higher energy prices.

Authorities’ Views

53. The authorities agreed that further SOE and market reforms could boost productivity and stressed advances in hukou reform. They highlighted that their pre-crisis target of reducing SOE leverage (liability-to-asset ratio) by 2 percentage points will be achieved by the end of 2020 despite the pandemic. They attributed differences in profitability and productivity between SOEs and POEs to market outcomes and residual SOE social and legacy responsibilities, seeing a level playing field between them. They remained committed to further pursuing mixed ownership reforms and improving SOE governance through corporate boards. The authorities noted that hukou reform has to a large extent already been completed, though there remains room to further reduce barriers and expand the set of benefits accessible to migrant workers.

54. The authorities reaffirmed the climate goals announced by President Xi but stressed the need for global cooperation. While acknowledging the immense challenge in achieving CO2 emissions peaking before 2030 and carbon neutrality before 2060, the authorities have started working on detailed plans to effectively reduce CO2 emissions. They are in the process of developing a national carbon emissions trading market and will expand the coverage. At the same time, the authorities stressed the need for international cooperation in achieving the commonly shared goal of slowing global warming.

B. Helping Solve the Global Crisis

55. China can lead on global solutions to overcome the global health and economic crisis. China can greatly help the global community to overcome the health crisis, by ensuring rapid production and equitable distribution of COVID-19 vaccines. China’s participation in the G20 efforts to bring relief to low-income countries is welcome, including the participation of Chinese official creditors in the extension of Debt Service Suspension Initiative (DSSI) as well as the common framework for debt treatments beyond DSSI. This common framework is expected to facilitate timely and comprehensive debt resolution with fair burden sharing including for private creditors. At the same time, strengthening the external lending frameworks by enhancing debt sustainability monitoring and transparency, can maximize the benefits to partner countries from infrastructure investment.

56. China and the global economy would benefit from a more open, stable, and transparent rules-based international trade system. A durable solution to the economic issues underlying trade and technology tensions would reduce uncertainty and boost global trade. China and its trading partners should work constructively together to adjust the global trading and investment systems to the changing global economy, including in the digital sphere, services trade, and investment facilitation. Efforts should continue to reach an agreement on China’s joining the WTO’s Government Procurement Agreement. The Regional Comprehensive Economic Partnership (RCEP) agreement was recently completed and its successful implementation would provide a boost to regional trade.

Authorities’ Views

57. The authorities stressed their commitment for global cooperation, including to accelerate the end of the crisis. With the pandemic clouding the global outlook, the authorities noted the pressing need for global cooperation and reiterated its commitment to make any approved vaccine developed in China widely available to all countries. They agreed that data transparency helps debt sustainability assessments and, as a result, also potentially helps attract foreign investors and noted their intention to further upgrade environmental criteria in overseas lending projects. The authorities agreed that a more open, stable, and transparent rules-based international trade investment environment is particularly important amid the rising geopolitical tensions and economic and trade frictions, to which a well-functioning multilateral system would provide better solutions. They saw technological decoupling as costly for all parties, while removing trade restrictions on high-tech products helps promote trade and reduce external imbalances.

Staff Appraisal

58. The Chinese economy continues its fast recovery from the health and economic crisis. A strong containment effort and macroeconomic and financial policy support have mitigated the crisis’ impact and helped the economy to rebound. However, growth is still unbalanced as the recovery has relied heavily on public support while private consumption is lagging. The pandemic has brought China’s inequality challenges to the fore and added to the many interconnected financial vulnerabilities already present before the crisis.

59. Important structural reforms have advanced despite the pandemic. Hukou reforms and the opening of the financial sector have advanced—for example, the negative lists for foreign investment were shortened further, foreign ownership caps on securities, fund management, futures and life insurance companies were removed, and restrictions on the investment quota of foreign institutional investors were removed. The patent law was amended to improve intellectual property right. However, progress in real-sector reforms has been slow, especially in the area of SOEs and competitive neutrality.

60. The balance of risks to the outlook is still on the downside. Faster-than-expected widespread availability of effective vaccines and therapies with proven success in treating COVID-19 could help lift confidence and accelerate the recovery relative to the baseline forecast both domestically and globally. But there are a number of significant downside risks. These include: (i) a failure of the handoff from public to private demand, for example because of a COVID-19 resurgence or a sudden tightening of financial conditions; and (ii) a further escalation of external pressure along multiple dimensions, such as binding limitations to China’s access to the international technology frontier and restrictions on financial flows through Chinese financial institutions operating in Hong Kong SAR.

61. Macro policy should remain moderately expansionary in 2021, with the policy mix reoriented to support more balanced growth. A moderately expansionary fiscal stance, shifting from infrastructure spending towards strengthening social safety nets and promoting green investment, will help secure a balanced recovery. Given low inflation, monetary policy should remain accommodative—which will also support the fiscal effort—while phasing out potentially distortionary measures such as lending targets and lending rate guidance as the recovery takes hold. Exchange rate flexibility will remain essential to facilitate adjustment to the new external environment.

62. Improving the effectiveness of fiscal and monetary policy will maximize policy space. With public debt already high and rising, fiscal policy should be made more effective by improving the macro-fiscal framework and intergovernmental coordination while leveraging digital technologies to deliver support to vulnerable groups. Further modernization of the monetary policy framework to strengthen the transmission of conventional interest rate policies would help improve credit intermediation.

63. Financial risks need to be addressed proactively. As the recovery takes hold, exceptional financial support measures which have helped avoid a credit squeeze, such as relaxed NPL recognition standards and repayment moratoria, can be replaced with proactive efforts to address problem loans and strengthen regulatory and supervisory frameworks. Resuming financial regulatory strengthening will help contain corporate leverage and reduce shadow-banking risks. A comprehensive bank restructuring framework is needed to lower systemic risks and continue de-risking.

64. There is significant scope to enhance resilience of the economy and the role of the private sector. Simultaneous implementation of key reforms—a further opening up of domestic markets, reforming SOEs and ensuring competitive neutrality with private firms while promoting green investment and strengthening social safety nets—will support a job-rich and balanced recovery. These reforms will also help boost potential growth, reduce external imbalances, and build a more resilient, green, and inclusive economy.

65. China should continue to lead multilateral efforts to address global challenges. This includes supporting international efforts to expand access to a vaccine, providing debt relief to low-income countries and sustainable financing for global infrastructure investment, and tackling climate change. China and its trading partners should work together to build a more open, stable, and transparent rules-based international trade system.

66. China should urgently address macroeconomic data gaps to further improve data credibility and policy making.

67. It is proposed that the next Article IV consultation with China take place on the standard 12-month cycle.

China’s Exit Strategy From COVID-191

China has successfully contained the outbreak and reopened the economy. This reflects a combination of swift and targeted lockdown measures, well-sequenced reopening policies, expanded testing, and enhanced tracing capacity leveraging technology and big data.

Targeted outbreak control is helping to contain the virus. Since the nationwide lockdown in February brought the virus under control, sporadic regional outbreaks have been contained with the help of highly targeted lockdown measures at the subdistrict level based on enhanced testing and tracing capacities and central government support. The targeted approach has minimized disruptions to economic activity while containing the virus’ spread.

Production resumed as epidemic moderated

(Cases; in percent, rhs)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: National Health Commission; National Development and Reform Commission.Note: Daily new infections on Feburary 20 not shown due to statistical changes.

Policymakers have been balancing economic normalization and virus containment by differentiating activity resumption across regions and sectors, with low-risk areas and critical sectors opening first. Regional lockdown measures have been gradually eased based on regularly updated risk assessments, with the epicenter Wuhan reopening last. Within regions, essential sectors such as industrial and transportation were prioritized while the reopening of schools and public places proceeded more gradually.2

China has significantly ramped up its testing capacity, with the weekly production capacity of nucleic acid testing kits reaching 46 million per week by August. Online testing reservation is widely available on WeChat and e-commerce platforms. The scope of testing has also expanded over time, from symptomatic cases to asymptomatic cases. To facilitate reopening, mandatory testing was conducted for high-risk groups, such as medics, teachers and students, public service workers. More recently, to contain regional outbreaks, city-wide testing has been undertaken in Wuhan, Beijing, Dalian, and Xinjiang. In addition, mandatory testing is conducted for international inbound travelers to prevent imported cases.

Regional containment stringency

(Index)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Announcements by local governemnts and health authorities.

Sectoral reopening of containment measures

(Index)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Announcements from local governemnts and health authorities.

The government has leveraged digital infrastructure and big data. A mobile health QR code is widely used to assess individual infection risk, manage mobility restrictions, and regulate entry into public places. Contact-tracing apps using big data on public transportation have also improved the efficiency of epidemic control measures. In addition, digitalization has facilitated business resumption during the pandemic, especially in healthcare, education, retail and food services, entertainment, and logistics.

1 Prepared by Longmei Zhang and Fan Zhang.2 The stringency indices track policy announcements in response to COVID-19 by local authorities. The policies were classified into 12 sectors, with ratings from “no restriction” (0) to “full closure” (3) for each sector at the time they took effect. The sectoral and provincial ratings were then aggregated to their respective national indices.

Impact of China’s Monetary and Credit Policies Amid COVID-191

Simulations using a DSGE model of conventional interest rate policy and non-interest rate credit policy illustrate that the PBC’s credit policy played an important role in supporting credit growth during the COVID-19 outbreak, including by preventing a marked increase in credit spreads.

Credit to the Chinese private sector has accelerated rapidly since the COVID-19 outbreak, helping cushion the crisis’ impact. Indeed, countercyclical credit dynamics have been one of the salient characteristics of recent crisis episodes (Figure 1.1). During the COVID-19 pandemic, this likely reflects increased liquidity needs in many sectors due to cash flow disruptions caused by mobility restrictions.

Figure 1.1.
Figure 1.1.

Credit Flow and Real GDP

(Year-on-year, percent change)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; Haver Analytics; and IMF staff calculations.Note: t = 2009Q1 for GFC and 2020Q1 for COVID-19. Credit flow is the flow of total social financing (TSF) adjusted to exclude government bonds, equity financing, and loan write-offs.

It is less obvious what role the credit policy has played in supporting credit supply and financial conditions. On the one hand, the PBC’s “conventional” monetary policy (i.e., policy rate cuts) has lowered lending rates and expanded non-interest rate credit policy (i.e., re-lending facilities) has provided banks with low-cost funding for targeted lending to certain sectors (micro and small businesses, manufacturing firms, and agricultural sector). On the other hand, standard empirical models, which focuses only on conventional monetary policy (for example, Chen and Kang (2018)), struggle to account for the strength of credit growth in China during crisis episodes (Figure 1.2).2

Figure 1.2.
Figure 1.2.

Difference Between Actual and Model-Predicted Credit Growth

(In percentage points; seasonally adjusted quarter-on-quarter growth)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; Haver Analytics; and IMF staff calculations.Note: The credit growth model is based on Chen and Kang (2018) with the adjusted TSF as the dependent variable. The average of the model-predicted values across different model specifications is used.

The Gertler and Karadi (2011) model (GK subsequently)—tailored to capture relevant characteristics of the Chinese economy and the pandemic—provides a convenient framework for quantifying the impact of the PBC’s policy rate cuts and expanded credit policy. The simulations model the COVID-19 crisis as a combination of a negative capital quality and a negative demand shock countered by conventional interest rate cuts and a credit policy governed by reaction rules calibrated to qualitatively match the pattern of post-COVID-19 WEO forecast revisions for output and investment (Figure 1.3). The policy rate response is constrained to match the observed declines in Chinese short-term interest rates and, following the original GK analysis, credit policy is allowed to vary in its responsiveness to spreads (aggressively, moderately or not at all). Importantly, since the model assumes that all credit is used for investment purposes, the results relied on estimates of the investment-related component of credit in China, which were lower than baseline forecasts in the January 2020 WEO in 2020H1 (Figure 1.3).

Figure 1.3.
Figure 1.3.

China: GDP, investment and investment-related credit

(In percent deviations from January 2020 WEO Baseline)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: CEIC; Haver Analytics; WEO database, IMF; and IMF staff calculations.Note: Investment-related credit is estimated by a simple regression model between credit growth and real investment growth rates.

Model simulations suggest that the PBC’s credit policy has been an effective tool to contain risk premium increases and promote credit growth. The results indicate that moderate interventions can limit the fall in credit by around 1 ppt, with aggressive policy twice as effective. Depending on the scenario, the central bank facilitates the additional intermediation of up to 5 percent of GDP of investment-related credit, with the credit policy further augmented by lower interest rates. The finding that lift-off occurs faster with credit intervention is testament to the effectiveness of such policies (Figure 1.4). Credit policy is also helpful in limiting the fall in asset prices, preventing increases in fiver-year credit spreads (Figure 1.5) and boosting credit by around 1–2 ppt (Figure 1.6).3

Figure 1.4.
Figure 1.4.

Response of interest rate

(Levels; in percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.Note: The nominal rate path is adjusted to account for the difference between the steady state inflation in the model and the historical long-run inflation in China.
Figure 1.5.
Figure 1.5.

Response of five-year credit spreads

(Levels; in percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.
Figure 1.6.
Figure 1.6.

Impact of central bank credit policy on credit

(In percent; deviations from no intervention)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.

However, policy makers should bear in mind the possible efficiency costs and financial stability risks associated with credit policies. It is important to ensure that loans funded by the PBC’s re-lending facilities continue to remain on banks’ balance sheets, because central bank-intermediated credit could contribute to moral hazard as banks neglect risk control and monitoring. In addition, the lending rate guidance and lending growth targets associated with the re-lending facilities may lead to credit misallocation risk not captured in the model simulations. Finally, the simulations suggest that credit policies lead to a more persistent build-up in private credit, which could add to China’s already high private sector leverage and exacerbate financial stability risks not captured fully in the GK setup.

1 Prepared by Fei Han and Pawel Zabczyk, with helpful input from Roland Meeks.2 Although not the focus here, eased financial policies such as lending targets and forbearance may have also contributed to the large residuals.3 Arguably, such policies are unlikely to be withdrawn overnight, so could end up being even more powerful than in our baseline simulations, i.e., higher expected persistence could translate into greater effects on contemporaneous demand.

Tracking Economic Activity in China1

This box presents updated estimates of economic activity relative to trend based on high-frequency data. While constructed with less extreme changes in economic activity in mind, the tracker of economic activity for China (C-TEA) suggests that the pandemic crisis left a deeper impact than the Great Financial Crisis.

Underlying the tracker is a factor model that relates an unobserved measure of economic activity at monthly or quarterly frequency to available indicators.2 Economic activity is composed of a time-varying trend and a cyclical component: Ut = UTt + UCt. All other observable economic indicators, Xi,t, and their trend, cyclical, and high-frequency components, are used to extract the signal about the economic activity, Ut. For many available variables, there is a strong and stable co-movement at cyclical frequencies, reflecting the unobserved aggregate economic activity.

Real imports are the key variable among the economic indicators. While not being the timeliest indicator, one of its benefits is the strong and stable co-movement between the cyclical components of output and imports across many countries. The parameter αm linking the activity and import cycles, M^t=αM×UC^t+ϵM,t, is calibrated using a median estimate of the link between imports and GDP in advanced economies. Another benefit of the imports data is their conceptual link to exports-to-China statistics from China’s trading partners. The latter variable is also included as a noisy measure of true imports.

Economic activity – gap

(In percent)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.

Other macroeconomic indicator helps to pin estimate and now-cast economic activity in real time. They include electricity production, industrial value added, PMI indicators, capacity utilization, and business climate surveys. Their role is to provide timelier estimate of the activity and lowering the uncertainty about the estimate.

The estimates illustrate the size of the slack in economic activity during the COVID-19 crisis. Despite a strong rebound in activity after the shock hit in 2020Q1, the gap remains deeply negative in 2020Q2 as activity has yet to fully recover to its pre-Covid level. These estimates need to be interpreted with caution: C-TEA-based estimates of activity in the first half of 2020 likely understate the extent of the contraction and the subsequent recovery as the tracker was not designed to capture very sharp and sudden swings in activity. Going forward, C-TEA-based estimates of activity will likely change as more data is made available and as the model structure is refined.

1 Prepared by Michal Andrle, Rafael Antonio Portillo and Fan Zhang.2 Please refer to the forthcoming IMF working paper “Tracking Economic Activity in China” for more details.

Lockdowns’ Spillovers Through Trade1

Empirical estimates of spillovers based on global daily trade data imply that supply disruptions due to lockdowns reduced global seaborne imports in February-March 2020 by about 10 percent, with China’s lockdowns contributing about 4 percentage points. While large, the spillovers are also found to be short-lived.

Maritime transport is at the core of world trade and it can be tracked in real time. Cargo ships are equipped with a device that periodically emits a radio signal. Different machine-learning techniques can be used to transform these data into estimates of trade volume, achieving a good fit to official statistics (WP 20/57).

Daily bilateral seaborne trade estimates can be used to trace the supply spillovers of lockdown measures. A country’s imports during the pandemic can be affected by the stringency of lockdown policies adopted by the partner countries that supply these goods. Because it takes time for ships to transport these goods, lockdowns can only have such an effect with a geography-induced lag. For example, the lockdown measures imposed in Asia in January and February impacted U.S. West Coast ports around two weeks later. As the ripple effects of these lockdowns reached its shores, U.S. West Coast import growth fell significantly.

Estimated world containerized exports

(In percent, ratio of volume to 2017–19 average)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Cerdeiro et al (WP 20/57).

The evidence points to large but short-lived supply disruptions driven by lockdowns. A model of daily seaborne import growth based on foreign lockdown exposures points to strong spillovers from lockdowns. Based countries’ trade exposures and the large estimated effect of lockdowns in the early stages of the crisis, the model implies that world seaborne trade volumes in February-March were around 4 percent lower due to lockdown restrictions in China, and around 10 percent lower due to lockdowns in other countries. The effect of countries’ lockdowns on their trading partners’ imports, however, becomes insignificant in the later stages of the crisis. Such short-lived nature of disruptions – despite the shock being unprecedented in scale – adds to existing arguments in support of globalized production on the grounds of efficiency and diversification benefits (see e.g. Bonadio and others., 2020).

Lockdown exposure (LE) and imports

U.S. West Coast

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Cerdeiro and Komaromi (forthcoming).

Ratio of actual vs. counterfactual world trade

(Counterfactual with no supply disruptions)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Cerdeiro and Komaromi (forthcoming).Note: Lockdown exposure coefficient becomes insignificant in April.
1 Prepared by D. Cerdeiro and A. Komaromi based on IMF WP 20/57, and a forthcoming working paper “Supply Spillovers During the Pandemic: Evidence from High-Frequency Shipping Data.”

Progress on Structural Reforms1

Reforms have been advancing, but there is significant scope to enhance resilience and the role of the private sector. There was continued progress in the opening up of the financial sector, hukou reform, and intellectual property protection. At the same time, there is still significant scope for SOE reform and strengthening the role of markets. Further reforms along these lines would help anchor domestic growth, reduce external imbalances, and build a more resilient, green, and inclusive economy.

Opening up: significant progress. Reforms have continued despite the crisis, with the government adopting a new foreign investment law, streamlining the negative list for foreign investment, accelerating financial opening up, lifting foreign ownership restrictions in selected areas, and implementing multiple rounds of tariff cuts. Nonetheless, market entry into China’s service sector remains restricted, and the effectiveness of the foreign investment law will depend on its proper implementation. Together with its trading partners, China can work to reform the WTO to reflect changes in the global economy, including in e-commerce and the service sector.

Labor and product markets: some progress. The government has made commendable efforts in streamlining business administration, relaxing hukou restrictions, and developing capital markets. However, there is scope for further reforms to unify product markets by removing local protections, improving labor market flexibility through more comprehensive hukou reforms that allow for greater labor mobility. Market reforms will also encourage foreign investors to take advantage of the progressive opening up of financial markets.

SOEs: limited progress. The government has adopted several measures, but there remains significant room for further reforms. The treatment of zombie central SOEs is largely complete but came mainly from mergers and acquisitions by other SOEs, resulting in fewer but larger SOEs. More fundamental reforms would include removing implicit guarantees and tightening budget constraints of SOEs. SOE deleveraging has paused, reflecting, in part, the pandemic crisis and the sectors’ effort to support growth. New rules to reduce government intervention in SOEs were drafted, but the role of the state in SOE governance has strengthened.

Rebalancing: some progress. The pandemic interrupted rebalancing, as households increased savings, social distancing affected the services sector, and government support emphasized investment. Efforts to tackle pollution have been strong but climate policies remain a challenge. The government has made significant effort in alleviating poverty, but income inequality remains high, with the pandemic crisis emphasizing the urgency of further strengthening the social safety net.

Financial sector: limited progress. Financial supervision broadly strengthened despite the unprecedented crisis, but there remains significant scope for further financial sector reforms. The authorities provided exceptional financial support measures during the COVID-19 shock by loosening NPL recognition standards, requiring banks to increase low-cost lending to risky borrowers, and delaying the implementation of the asset management reforms. These measures can be phased out as the recovery takes hold as they run the risk of undoing recent progress in strengthening bank transparency and governance. The recent proposed revision to the Commercial Banking Law promises to strengthen authorities’ bank restructuring tools, but a fully functioning resolution framework is still urgently needed to support the orderly exit of non-viable banks.

Policy frameworks: some progress. The authorities have made good progress in capital market reforms and reformed the loan prime rate, with the success of these measures hinging on implementation and continued modernization of frameworks. Monetary policy transmission could be enhanced by further moving towards an interest rate-based framework and phasing out deposit rate guidance policies. Fiscal policy would benefit from accelerated efforts to develop a comprehensive medium-term fiscal framework.

1 Prepared by Sarwat Jahan and Longmei Zhang.

The Effects of Technological Decoupling1

An approach that accounts for the effects of sectoral misallocation, lower knowledge diffusion, and macroeconomic adjustment costs, finds significant potential lossesincluding for global technology hubs. The losses are even larger if third countries align themselves with the hub they trade most with.

Global high-tech production is heavily diversified across borders. Technological decoupling can be especially harmful to the global economy as high-tech production is heavily based on cross-border trade. For example, the share of foreign vale added in gross exports in the electronics sector is significantly higher than for all sectors in aggregate, both for China and for OECD countries.

Decoupling is assessed using a model with multiple layers. The first layer, capturing sectoral misallocation, is based on results from a general equilibrium trade model with intermediates where non-tariff barriers in high-tech sectors are raised high enough to eliminate trade between countries that decouple from each other. The second layer reflects the effects of disrupting global knowledge sharing on labor productivity, as existing trade and investment relationships are severed and countries can no longer build on the advances of each other. Both layers are then incorporated into the Fund’s macroeconomic model, which, in addition, accounts for transitional unemployment and other short-to medium-term costs linked to nominal and real rigidities (see Cerdeiro, Eugster, Mano, Muir and Peiris, forthcoming, for further details).

Share of foreign value added in gross exports

(In percent, 2015)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: OECD Trade in Value Added (TiVA).

Multiple decoupling scenarios are considered. We explore a bipolar China-U.S. decoupling, as well as the possibility of a tripolar technological world. For illustrative purposes only, we investigate the implications if China, the U.S., and Germany (as an example for a European country) were to seek to decouple from each other. Third countries either freely trade with each hub or align themselves exclusively with the hub with which they trade the most (labeled as ‘preferential attachment’).

Most countries lose from decoupling, including the global technology hubs. In a scenario where China and the U.S. decouple but other countries avoid preferential attachment, the level of China’s real GDP is 1.8 percent lower in the longer term, with losses accumulating over time. The U.S. also loses under this scenario, with its real GDP decreasing by 1.1 percent in the longer term. Potential losses are significantly larger in a multipolar tech world because most countries trade with more than one of the technology hubs. And, in both cases, losses are amplified if third countries preferentially attach themselves.

Notes: Scenario 1: U.S.-China decoupling without preferential attachment. Scenario 2: U.S.-China decoupling with preferential attachment. Scenario 3: U.S.-China-Germany decoupling without preferential attachment. Scenario 4: U.S.-China-Germany decoupling with preferential attachment.
1 Prepared by Diego Cerdeiro and Huidan Lin.

China’s Fiscal Policy: A Medium-Term Rebuilding1

China has fiscal space, but it has narrowed—augmented debt is more than 90 percent of GDP, the population is aging, reaching carbon neutrality by 2060 will likely have fiscal implications, and off-budget government liabilities continue to grow. This adds importance to following through with fiscal adjustment over the medium term that puts the augmented deficit on a stable path. A fiscal policy that focuses on high-multiplier spending and making the tax system more progressive would limit the adjustment drag on growth.

China has some fiscal space for temporary stimulus but not for a permanent rise in the deficit. Augmented general government debt is high and rising.2 Fiscal support during the pandemic will push augmented debt to 92 percent of GDP in 2020, up from an estimated 81 percent of GDP in 2019 and 34 percent of GDP in 2008. Gross financing needs in 2020 are projected to be 30 percent of GDP. At these levels, public debt and financing needs place a large burden on the domestic financing system. However, in the short term, the general government’s positive net financial worth—estimated to be 10.5 percent of GDP in 2017—low real borrowing cost, and a closed capital account provide some fiscal breathing room.3

Augmented debt path under different adjustment scenarios

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: IMF staff calculations.

Debt does not fully stabilize in the projection period and financing needs remain large. The baseline assumes a neutral fiscal stance in 2021 followed by annual fiscal adjustments, which, along with the recovery in growth, lower the deficit to 13.8 percent of GDP in 2025 from 17.2 percent of GDP in 2021. The baseline projects the output gap to essentially close by 2025 even with fiscal adjustment starting int 2022. Fiscal consolidation will slow the rate of increase of government debt and annual gross financing falls, but augmented debt still rises to 113 percent of GDP in 2025. A more ambitious path which would more than double the assumed average annual consolidation effort after 2021 and leave the headline deficit at 10 percent in 2025 would fully stabilize the debt-to-GDP ratio by 2025.4 If there is no adjustment, the debt burden would continue to rise sharply and exceed 120 percent of GDP in 2025.

China’s debt dynamics underline the urgency of delivering the assumed baseline consolidation. It strikes a balance between the need to protect the post-pandemic recovery while ending a 10-year period of increasing deficits and stabilizing debt as a percentage of GDP by the end of the decade. This would provide the government some additional fiscal space to accommodate pension and health spending pressures as the population ages. It also would provide insurance against the realization of fiscal risk, for example from absorption of off-budget government liabilities.

A more effective fiscal policy could limit the impact of fiscal adjustment on growth. Improvements in the tax-benefit system that transfers resources to less well-off individuals, who have a relatively higher consumption propensity, could limit the drag from adjustment on growth. Reprioritization of social safety net spending over infrastructure investment would also make growth more resilient by incentivizing households to reduce their high savings rate—reinvigorating economic rebalancing towards private consumption. In addition, development of a comprehensive medium-term fiscal framework would reduce uncertainty on the direction of fiscal policy possibly stimulating private investment.

1 Prepared by John Ralyea.2 General government debt plus off-budget liabilities of local government financing vehicles, government-guided funds and special construction funds.3 The baseline assumes an effective average interest rate of 3.3 percent over the projection horizon. This implies real borrowing costs of 1 percent or less.4 The baseline envisages an average annual adjustment in the cyclically adjusted primary balance (CAPB) of ¾ A percentage point of GDP. The ambitious scenario has an adjustment of 1¾ percentage points of GDP in the CAPB.

China’s Development of a Central Bank Digital Currency1

China is developing a central bank digital currency (CBDC) named e-CNY and has begun large-scale testing. The e-CNY, designed for domestic use only at this stage, will be a non-interest-bearing cash substitute issued by the PBC and distributed in a two-tier system via the banking system. It will likely increase payment efficiency and financial inclusion, while operational risks in case of a large-scale issuance should be closely monitored.

The development of the e-CNY has accelerated in recent months. In 2014, China became one of the first major countries to start exploring a CBDC. Compared to private third-party payment providers (such as Alipay and WeChat Pay), the e-CNY could potentially achieve a higher degree of anonymity, higher compatibility across payment platforms, and offline usage, broadening the reach to people with limited access to financial services. The e-CNY will be used for domestic transactions initially, but could be broadened to cross-border payments in the future. Recently, PBC has partnered with more than 20 companies to test the e-CNY in four cities, including selected banks and e-commerce platforms, and is planning a test at the 2022 Beijing Winter Olympics with a tourist/player usage scenario.

The CBDC is designed to be a cash substitute distributed in a two-tier system. The e-CNY will be a legal tender combining digital currency and electronic payment characteristics. It will be a cash substitute (M0) and distributed in a two-tier system through commercial banks (text figure). Small transactions would be anonymous at the user level, but the PBC could retrieve the transaction history for regulatory purpose and implement “managed anonymity.” The centralized management and a “loosely coupled” design will allow payments and transfers without a bank account.

The CBDC could promote financial inclusion and improve payment efficiency.

  • Financial inclusion. The e-CNY could expand the coverage of payment services to the unbanked residents and lower transaction costs for households and small firms, increasing efficiency. This could improve their access to finance and further promote financial inclusion.

  • Monetary policy. The e-CNY is unlikely to challenge the existing monetary policy framework as the two-tier system will likely keep the money supply system unchanged and the non-interest-bearing feature will help limit the competition between e-CNY and bank deposits. Meanwhile, higher financial inclusion may strengthen monetary policy transmission. Moreover, the easier conversion between e-CNY and interest-bearing assets compared with cash could increase household and corporate holdings of interest-bearing assets and hence their interest rate sensitivities.

  • Financial stability. The e-CNY as a legal tender has less counterparty risk than third-party payment providers. Some disintermediation may be envisaged, but such risks could be mitigated by the non-interest-bearing feature and by introducing limits on daily transfers between bank deposits and e-CNY. Provided the required AML/CFT measures are in place, “managed anonymity” may help streamline certain compliance processes while providing some privacy protection.

Flow of Funds with CBDC

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Source: Ya o (2018).

Financial risks from the e-CNY should be carefully monitored and assessed. In case of a large-scale issuance, the PBC may have to contend with operational risks from disruptions and cyberattacks, as well as challenges to privacy protection from the centralized collection and storage of user data. Although the e-CNY could facilitate the PBC’s liquidity distribution process compared to cash, it may also increase funding costs for banks and could add to bank run risk during periods of distress, particularly for smaller banks.2 When considering a possible future cross-border usage, the efficiency gains should be weighed against the potential impact on the existing exchange rate policy and capital account framework.

1 Prepared by Fei Han, Alfred Schipke, and Longmei Zhang.2 See the IMF Staff Discussion Note “Casting Light on Central Bank Digital Currency” (2018).

Summary of the Proposal on China’s 14th 5-Year Plan1

A proposal released at the conclusion of China’s fifth plenum offered broad outlines of China’s 14th Five-Year Plan (2021–25). The plan vows to promote technological self-reliance, implement the strategy of sustainable development, and develop a robust domestic market, reinforcing existing commitments. While not suggesting specific GDP growth targets, the communique laid out a 15-year goal to raise per capita output levels to that of a moderately developed country by 2035, while strengthening China’s technological capacities. A more detailed report on the 14th Five-Year Plan will be released after approval by the National People’s Congress in March 2021.

Self-reliance in technology is a major theme, highlighting China’s focus on home-grown technological innovation to drive sustainable growth amidst a complex international environment. The “2035 vision” aims to achieve major breakthroughs in key core technology by 2035.

The implementation of a “dual circulation” strategy does not mean a retreat from China’s opening up. It is rather a long-term strategy to enhance the resilience of China’s economic development by strengthening its domestic economy. China will continue to promote international trade, broaden access to Chinese markets, and invest overseas. The communique also emphasizes that a complete “decoupling” between China and the U.S. is unrealistic and would hurt both countries and the world.

China will aim to achieve “sustained and healthy” economic development in 2021–2025, with a focus on higher quality growth. Plans include steps to strengthen China’s employment by improving employment support for key groups, building a high-quality education system, and improving care for the elderly and the social security system.

The communique reaffirmed the climate goals introduced by President Xi. The Five-Year plan calls for a significant green transformation of production and lifestyles. It would seek to improve energy and resource efficiency, while steadily reducing total volumes of major pollutants. Moreover, it vows to speed up modernization of agriculture and rural areas, ensure national food security and improve agricultural quality and competitiveness.

1 Prepared by Wenjie Chen and Xin Li.
Figure 1.
Figure 1.

China: Recent Developments—The “V”-Shaped Recovery

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 2.
Figure 2.

China: Rebalancing—Regression in Wake of the Crisis

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 3.
Figure 3.

China: External—Increasing Current Account Surplus and Volatile Capital Flows

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 4.
Figure 4.

China: Fiscal—Pandemic Response Accentuated Existing Trends

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 5.
Figure 5.

China: Monetary—Policy Eased but Inflation Remained Low

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 6.
Figure 6.

China: Credit—Credit Growth Accelerated and Debt Levels Increased

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 7.
Figure 7.

China: Financial Market—Funding Conditions Turned Tighter After Initial Easing

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Figure 8.
Figure 8.

China: Banks—Sector Expands Amid Rising Profitability Pressures

Citation: IMF Staff Country Reports 2021, 006; 10.5089/9781513566184.002.A001

Table 1.

China: Selected Economic Indicators

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Sources: Bloomberg, CEIC, IMF International Financial Statistics database, and IMF staff estimates and projections.

IMF staff estimates for 2019.

Surveyed unemployment rate.

Includes government funds.

Average selling prices estimated by IMF staff based on the data of national housing sale values and volumes published by the National Bureau of Statistics

Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general budgetary government balance, including government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.

T he estimation of debt levels after 2015 assumes zero off-budget borrowing from 2015 to 2025.

Expenditure side nominal GDP.

The augmented balance expands the perimeter of government to include government-managed funds and the activity of local government financing vehicles (LGFVs).

Table 2.

China: Balance of Payments

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Sources: CEIC; IMF, Information Notice System; and IMF staff estimates and projections.

Includes counterpart transaction to valuation changes.

Includes foreign currency reserves and other reserve assets such as SDRs and gold.