People’s Republic of China: 2021 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China

1. A vast majority of Chinese have been vaccinated but increasingly frequent outbreaks of more contagious variants have forced repeated lockdowns.


1. A vast majority of Chinese have been vaccinated but increasingly frequent outbreaks of more contagious variants have forced repeated lockdowns.

Context: Covid-19, Regulation, and Climate

1. A vast majority of Chinese have been vaccinated but increasingly frequent outbreaks of more contagious variants have forced repeated lockdowns.

  • The combination of more frequent outbreaks and a zero-COVID tolerance approach has forced China’s economic activity into a stop-and-go pattern. The COVID-19 playbook of rapid lockdowns and mass testing is facing challenges as new virus mutations become more transmissible. COVID-19 outbreaks of the Delta variant are occurring at closer intervals and infecting wider areas, with three large outbreaks taking place between July and November, and the latest recording over 1,300 cases across 21 out of 31 provinces, making it the most widespread Delta outbreak in China so far. Many regions introduced sweeping curbs, barring entry for people from high-risk areas and cutting off transportation from virus hot spots. The repeated outbreaks have made a complete resumption of pre-COVID-19 activity difficult, especially in the services sector.

  • Although China’s vaccination program is well advanced, it remains unclear whether it will allow for lockdowns to be phased out. China has surpassed the stated goal of inoculating 80 percent of the population by year-end, having administered an impressive 2.5 billion doses as of beginning-December—more than a third of the global total—with 82.5 percent of the total population having been fully vaccinated. However, even with booster shots and children’s vaccination under way, the efficacy of vaccines against the Delta variant may be waning, and new variants such as Omicron may pose additional challenges, making achieving herd immunity difficult.


China: Large Outbreaks Have Been Accompanied by Growth Declines

(LHS: Number of confirmed cases; RHS: quarter-on-quarter seasonally adjusted annualized growth, in percent)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: National Health Commission; and IMF staff calculations.

2. A wave of regulatory policy measures and limited progress in pursuing key structural reforms has raised concerns about state intervention using non-market-based measures. With the 2021 growth target of “above 6 percent” an easy reach, the authorities prioritized corporate and local-government deleveraging and regulatory tightening. The regulatory efforts were aimed, among other things, at enhancing competition, consumer protection and data governance in the technology and fintech related sectors. However, the multitude, timing, seemingly uncoordinated, and discretionary nature of these interventions, is viewed by market participants as undercutting the role of private enterprises and has led to heightened policy uncertainty and financial market volatility. The lack of a clear, coordinated, and well-communicated policy response to financial stress faced by large property developers, following efforts aimed at reducing leverage in the real estate sector, has added to the uncertainty. At the same time, there was little or no progress in core areas of market-enhancing reforms such as removing implicit guarantees for state-owned enterprises (SOEs). Indeed, there are signs that SOEs will continue to play a significant role in implementing government priorities going forward—for example, with regard to improving technological self-reliance and implementing the climate agenda.

3. The authorities are moving to implement their important but challenging climate agenda to first reach peak carbon emissions before 2030 and then carbon neutrality before 2060.

  • High-level coordination and action plans. There are strong indications that all levels of government and ministry have started the process of implementing China’s climate agenda, and a high-level group of key officials has been tasked with the planning and implementation of the overall strategy for carbon peaking and carbon neutrality. The authorities have published overarching working guidance on how to achieve carbon neutrality as well as a detailed carbon-peaking action plan, with more sector-specific directives to follow.

  • Steep, backloaded carbon path. China’s planned carbon path, while not yet completely spelled out, suggests a relatively steep adjustment. While existing regulatory limits on energy intensity growth have contributed to recent power shortages, the overall adjustment path is significantly backloaded and allows for the level of carbon emissions to further increase until 2030. Shifting adjustment to the future drives up the cost of adjustment overall because the required green investment is compressed into a shorter period in the future and there is less time to reap the economies of scale and positive technological spillovers from developing renewables and other helpful technology. The steepness of the adjustment path and the higher decarbonization costs due to backloading translate into a high theoretical shadow price of carbon, estimated at around US$285/ton by 2040.1 The same factors also imply that the overall level of decarbonization costs associated with China’s climate commitments are relatively high compared to other countries—however, it must be noted that model-generated projections of costs and prices are highly assumption-driven and inherently difficult to compare across countries.

  • Large financing needs. The authorities have signaled large investment needs for the decarbonization efforts—including upgrades to their power grid system—a significant share of which they expect to mobilize through private sector sources via green finance. They have started the process of bringing green finance disclosure requirements closer to international standards and unifying financial products’ green classification. Recent progress includes ongoing work with the European Commission detailing commonalities and differences between their respective green taxonomies. The People’s Bank of China (PBC) has recently rolled out a new lending facility to support bank lending to firms conducting green projects, while another planned relending facility has been announced to promote clean and efficient processing of coal.


China: Decarbonization Path Is Steeper and Back-Loaded

(In tons of CO2)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: IMF-ENV model; IMF World Economic Outlook; and IMF staff calculations.

China: Abatement Cost Is Much Higher

(Average annual deviation in real GDP from business-as-usual in percentage points)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: IMF-ENV model; IMF World Economic Outlook; and IMF staff calculations.Notes: Estimates based on simulations using a dynamic computable general equilibrium model and are average real GDP deviations between an optimal carbon tax vs. business-as-usual scenarios between 2022 and 2050. For China, the model assumes CO2 emissions peak in 2030.

4. The external environment has become more difficult with decoupling pressures broadening from technology access to financial markets. While there has been closer cooperation between the U.S. and China in tackling the threat of climate change, several open issues remain. China has tightened regulations on U.S. listings by technology and data-heavy firms, potentially impeding their access to international financial markets. The current U.S. administration has yet to lower the high tariffs on imports from China and has maintained the previous administration’s restrictions on technology exports, the threat of secondary sanctions on financial entities in response to the national security law in Hong Kong SAR and forcing compliance of U.S.-listed Chinese firms with U.S. auditing requirements to avoid de-listing. China and the European Union (EU) reached a comprehensive agreement on investment, but the European Parliament has voted to freeze its ratification.

Developments: Shifting Policy Focus AMID a Still-Unbalanced Recovery

A. Macroeconomic Policy Tightening and Slowing Momentum

5. The growth momentum is slowing as consumption continues to lag, leaving some slack in the economy and keeping domestic CPI inflation pressures low. Recently, temporary power curbs have increased supply-side headwinds.

  • The early path of recovery relied on public demand followed by robust exports and still-solid investment, but its momentum has slowed notably in the second half of 2021. While exports continue to benefit from pandemic-related demand, public investment and real estate investment are expected to contract by -7 and -2 percent, respectively, in 2021, with the latter reflecting various policy measures to rein in property speculation—including curbing developers’ financing conditions, raising mortgage rates, and reforms to land auction schedule. The escalation of liquidity stress faced by some property developers, coupled with contracting housing sales, has added to the slowdown of real estate investment.

  • While average sequential headline GDP growth has reached its pre-crisis trend, the level of private consumption is still well below its pre-crisis forecast (see Figure 1). The lingering weakness in consumption and still-elevated household savings are likely the result of prolonged uncertainty surrounding the virus and vaccine efficacy and a still-soft labor market as new urban job creation is still hovering below 2019 levels. This leaves a negative output gap estimated at 1.5 percent for 2021.

  • A confluence of factors including coal shortages, a strong but unbalanced recovery, and regulatory limits on energy intensity have led to temporary power curbs. Coal shortages from curtailed domestic production, restrictions on coal imports, global coal price surge and the underperformance of non-fossil fuel energy sources exacerbated power supply issues but have since been largely addressed. Heavy reliance on energy-intensive production made it challenging to fulfill long-standing climate targets with local governments resorting to power rationing and curbing high-energy intensity production, including steel.2

  • Despite recent surges in producer prices, domestic inflation pressures have remained low. Higher global commodity and domestic steel prices—the latter due, in part, to local efforts to reduce carbon emissions—have lifted producer prices but have been slow to pass through to consumer prices (1.5 percent year-on-year in October 2021) as these upstream inputs account for a relatively small share of materials purchased by producers of final consumption goods, and because private consumption remains relatively weak.

Figure 1.
Figure 1.

China: Recent Developments—The Unbalanced Recovery Continues

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001


China: Private Consumption Is Still Below Pre-Pandemic Levels, While Other GDP Components Have Declined

(Difference in GDP components between outturn and 2020 January WEO update, in percentage points of GDP)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: IMF World Economic Outlook; and IMF staff calculations.

6. Macroeconomic policies have tightened significantly (see Box 1). Most of the tightening came from fiscal policy, which turned strongly contractionary at the beginning of 2021, reflecting the authorities’ shifting policy focus away from supporting the recovery to regulatory tightening and deleveraging. The augmented cyclically adjusted primary deficit (CAPB) is expected to narrow by about 2.7 percent of potential output in 2021, compared with a projected neutral stance at the conclusion of the last Article IV consultation in December 2020. The withdrawal largely represents decreases in public investment—the primary channel of fiscal stimulus during the pandemic—the removal of most COVID-19-related exemptions on social security contributions, and general reduction of expenditures by all levels of government.3 Overall, government spending in 2021 is projected to be lower than in 2019 (see Figure 2). Monetary policy has tightened moderately compared to 2020, as key money market rates increased relative to their pandemic lows, and overall credit growth slowed in 2021 (both in year-on-year and sequential terms) despite the continuation of structural credit policies to steer bank credit to small firms and specific sectors (see Figure 6).4

Figure 2.
Figure 2.

China: Fiscal—Significant Tightening Poses Drag on Growth

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Figure 3.
Figure 3.

China: Monetary—Tightened Policy Despite Below-Target Inflation

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Figure 4.
Figure 4.

China: Rebalancing—Slow to Revert to the Pre-Pandemic Trend

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Figure 5.
Figure 5.

China: Credit—Credit Growth Decelerated Amid Slowed Recovery

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Figure 6.
Figure 6.

China: Financial Market—Funding Costs Have Declined Recently

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001


China: Fiscal Policy Stance Has Turned Contractionary

(In percent of GDP or potential GDP)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: CEIC, 2021 budget document; and IMF staff calculations.Notes: Special bonds include local government and Treasury issuances; social security fund calculated as contributions less expense.

7. Shortcomings in the social protection system have added to widening income inequality and the halting recovery of household demand. Despite ongoing reform efforts, the coverage provided by China’s social protection system is still incomplete and benefit levels remain inadequate (see Box 2 and Selected Issues Papers (SIPs) 1 and 2). For example, less than half of urban employees are covered by unemployment insurance, and urban households generally enjoy much higher benefits than rural ones—about 230 million migrant workers were left out of urban unemployment insurance benefits during the pandemic, in part, because of lack of household registration in cities (hukou). While China’s basic medical insurance coverage is high, its low adequacy leaves households, especially the poor and in rural areas, exposed to high medical costs exceeding benefit payments, including from emergency or chronic illnesses. These gaps were exacerbated during the pandemic.


China: Participation Is Low in Some Social Insurance Programs

(Millions of participants)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: National Bureau of Statistics; International Labour Organization; and IMF staff calculations.

8. The investment-driven recovery has reversed earlier, hard-won progress in rebalancing, adding to the challenges of achieving sustainable high-quality growth over the medium term (see Figure 4). Rebalancing towards consumption regressed sharply in 2020 and normalization is projected to have remained slow in 2021. The contribution of services to GDP growth has fallen throughout the pandemic, with services employment growing slower than industrial employment for the first time since 2012. With many of the negative effects especially on the services industry concentrated in urban areas, the urban-rural income gap continued to drop— but this came at the expense of urban workers and amid growing income inequality within urban areas.

Authorities’ Views

9. The authorities acknowledged that the zero-COVID tolerance strategy is impacting the recovery of private consumption but saw its benefits outweighing any economic costs. While pointing out that periodic lockdowns are curbing the overall level of contact-intensive spending, they stressed that total final consumption, including public consumption, has had a large contribution to growth in 2021. Separately, they saw the impact of power shortages as temporary and noted that they have been swiftly alleviated by increases in coal output, support to coal power companies to increase power supply, reforms and improvements in the market formation mechanism of coal power prices, and the resolute curbing of the blind development of high-energy consumption and high-emission projects.

10. The authorities viewed that macroeconomic policies have been supportive of the recovery. They stressed that fiscal policy orientation in 2021 remained proactive (the official deficit-to-GDP ratio in 2021 is lower than in 2020), maintained a relatively high intensity of expenditure and focused on improving the quality, efficiency, and sustainability of fiscal activity. While appropriately reducing the deficit-to-GDP ratio and the quota for new special local government bond issuance, targeted fiscal support was provided, including by implementing specific tax and fee cuts, normalizing the direct funding mechanism, further optimizing the spending structure, and improving the efficiency of spending, etc. The authorities also saw monetary policy support for the economy remaining strong, pointing to the strong base effect lowering annual credit growth in the second half of 2021. They noted that corporate borrowing rates have declined, providing a conducive environment for investment. The authorities continued to view structural credit policies as effective in supporting small and medium enterprises (SMEs) as well as adding to aggregate liquidity.

B. Financial Vulnerabilities Remain High

11. A broad regulatory campaign to reduce leverage and other risks in the real estate sector has triggered financial stress among property developers. After years of welcome but unsuccessful attempts to limit the buildup of sectoral leverage and speculative investment in real estate, the authorities redoubled their efforts in August 2020, imposing stringent benchmarks (the “three red lines”) on developers to limit borrowing.5 These were complemented by new property lending concentration rules for banks and local-level initiatives to restrict the quantity of new mortgage approvals. These policies not only slowed real estate investment and sales, reduced inventories, and tamped down house price growth, but also exposed existing vulnerabilities among property developers. Unable to comply with the “three red lines” framework, some large and highly leveraged developers are facing severe liquidity stress owing in part to a sector-wide tightening of borrowing conditions, particularly in the bond markets. These strains are jeopardizing their ability to honor their debt obligations and complete the large stock of unfinished homes paid for in advance by households.


China: An Increasing Portion of Property Developers Are Facing Tighter Financing

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: Capital IQ; and IMF staff calculations.Notes: The bars show selected liabilities of property developers according to their compliance with the “three red lines” regulatory criteria that were introduced in August 2020. The criteria are described in footnote 5.

12. The authorities have moved to avert a credit crunch among developers, but policy action has come in a piecemeal fashion and uncertainty remains elevated, exacerbated by the lack of data. The authorities pledged to support the stability of the property market, while taking steps to ensure delivery of ongoing housing projects. However, defaults and other signs of financial stress among property developers remain elevated and housing sales have slowed. Poorly disclosed off-balance sheet risks among developers and their opaque linkages to banks and the shadow credit sector have further added to uncertainty.

13. The pandemic has elevated already-high financial vulnerabilities among other corporates, households, and local governments.

  • Exceptional financial support measures have led to higher corporate and household debt (see Figure 5). While these measures helped avoid a potential credit shortfall during the pandemic, their continuation contributes to the delay in the recognition of problem assets and exacerbates credit misallocation (see below).

  • Financial conditions are tightening for local government financing vehicles (LGFVs) and local SOEs. Rightly concerned about high leverage and rising financial vulnerabilities, the authorities have implemented new restrictions on local governments’ off-balance sheet financing channels. This has elevated liquidity risks for LGFVs and local SOEs with large and growing debt but limited debt-servicing capacity, especially in fiscally weak provinces, many of which have significant interconnectedness with local banks (see SIP 3).6


China: Private-Sector Debt Levels Are High

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Sources: Haver Analytics; and IMF staff calculations.Note: Corporate debt includes external debt but excludes LGFV debt.

Authorities’ Views

14. The authorities saw the property sector as generally healthy and financial risks under control. The authorities attributed the recent stresses in the financing of a few developers to their operating difficulties due to past mismanagement. They considered the spillover risks from these strains to the financial industry as limited as these developers’ financial liabilities are dispersed and individual lending institutions have relatively small risk exposures. The authorities emphasized that they have taken actions to avoid the sudden tightening of credit to the broader real estate industry and noted that operational and financial conditions of most other real estate developers remain healthy. More broadly, they also assessed overall financial sector risks as manageable. The authorities pointed out that China’s total debt-to-GDP ratio has declined slightly in recent quarters and that the banking sector has remained stable with strong risk buffers and low non-performing loan ratios.

C. Structural Policies Focusing on the Data and Technology Sector

15. A slew of sudden, new, and wide-ranging regulatory policy measures has taken financial markets by surprise, creating policy uncertainty, and possibly adding headwinds to growth. In rapid succession, the authorities have rolled out regulations for businesses in food delivery, online education, gaming, liquor, cosmetics, and online pharmacy, driven by changing government priorities around competition, consumer protection, data governance, technological self-reliance, and—in the context of the overarching policy shift toward “common prosperity”—inequality. Some of these regulatory actions against technology companies are intended to improve competition—reinforced by recent amendments to the Anti-Monopoly Law that will increase regulators’ discretionary power— and financial stability and, if well implemented, have the potential to support growth going forward. However, the short-term effect of these multiple regulatory initiatives included large selloffs of Chinese equities across markets (see Figure 6), reflecting increased investor discomfort with a rapidly changing business environment that is viewed by market participants as undercutting the role of private enterprises and paving the way toward more state control over economic activity. The worsening of market sentiment could, in turn, raise financing costs for firms and lower investment.


China: Some Measures of Policy Uncertainty Have Increased

(Index = 100 average between 2000M1 to 2021M11)

Citation: IMF Staff Country Reports 2022, 021; 10.5089/9798400201356.002.A001

Source: Davis, S.J., Liu, D., and Sheng, X.S. (2019). ‘’Economic Policy Uncertainty in China Since 1949: The View from Mainland Newspapers.”

16. Market dynamism and productivity growth have slowed and are unlikely to revive in the absence of SOE and competitive neutrality reforms. China’s business dynamism has been on a declining trend since the early 2000s (see SIP 4). While a more active competition policy in the technology sector can help, it is unlikely to reverse these aggregate trends. All available evidence suggests that the still-large role of SOEs is a key factor in this regard.7 SOEs are, on average, 20 percent less productive than private firms in the same sector, and the decline in business dynamism is particularly pronounced in sectors and regions with large SOE presence. Yet, the role of SOEs in the economy remains significant even as profitability is declining (see Table 7)—in part reflecting SOE contributions to economic stabilization efforts during the crisis (see Box 3). Moreover, SOEs are being asked to help with the implementation of China’s climate goals and to increase R&D spending for the development of homegrown technologies against the backdrop of increasing technological decoupling pressures, contributing to competitiveness concerns amongst trading partners.

Table 1.

China: Selected Economic Indicators1

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

Historical data up to date as of December 15, 2021.

IMF staff estimates for 2020.

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.

The estimation of debt levels assumes zero off-budget borrowing from 2015 to 2026.

Production 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: General Government Fiscal Data

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Sources: CEIC; China Ministry of Finance; National Audit Office; and IMF staff estimates and projections.

Includes central and local governments’ transfers to general budget from various funds, carry-over.

Includes adjustments to budget stabilization funds.

Including only revenues/expenditures for the year, and excluding transfers to general budget and carry over.

Includes carry over counted as revenue, adjustments to local government spending, proceeding from issuing special purpose bonds, and net expenditure financed by land sales estimated by subtracting the acquisition cost, compensation to farmers, and land development from the gross land sale proceeds.

The overall net lending/borrowing includes net land sale proceeds as a decrease in nonfinancial assets recorded above the line.

Ministry of Finance debt only, excludes bonds issued for bank recapitalization and asset management companies.

Includes local government bonds and explicit debt.

Two-thirds of new contingent debt is assumed likely to be recognized as general government debt.

Total social capital constribution to SCF and GGFs.

Includes only 2/3 of LGFV debt, being categoried as government explicit debt according to NAO report (2013), and excludes the rest 1/3, being categorized as government guaranteed debt or “possible to be recognized” debt.

GDP in this table refers to expenditure side nominal GDP.

Table 3.

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.

Table 4.

China: Monetary and Credit Developments

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Sources: Haver Analytics; People’s Bank of China (PBC); and IMF staff estimates.

The TSF numbers for 2016 are calculated based on the old TSF without government bonds and adjusted to include the local government debt swap. The TSF numbers from 2017 onward are the new TSF (revised by the PBC in December 2019) which includes all government bonds.

Others include local government debt swap and other components in 2016, and include asset-backed securities, loan write-offs, and other components from 2017 onward.