The pandemic highlighted weaknesses in the health and social security systems and pushed many households and firms to the brink of bankruptcy. It further widened inequalities between: (i) central provinces and the coast; (ii) already indebted poor households and wealthier ones and (iii) the private sector, with limited access to infrastructure contracts and hardly hit by slackened demand, and the state-owned sector. Such divides need to be addressed to make growth inclusive and sustainable.
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2021 Structural Reform Priorities
Following the steepest quarterly dive and subsequent surge on record in the first and second quarters of 2020, respectively, and then stabilisation in the third quarter, activity is projected to return to its past trajectory, with growth of about 8% in 2021 and 4.9% in 2022. New COVID-19 cases have reappeared sporadically, but the coronavirus outbreak seems largely under control in most of the country. Investment, in particular debt- and stimulus-fuelled infrastructure investment, has boosted growth in 2020. Real estate investment has also remained strong. Exports have boomed on the back of pent-up demand for masks and other COVID-19-related materials and equipment as well as teleworking-related goods. Consumption is still to recover from the hit caused by the outbreak. Even though sales of luxury goods are booming and box office revenues have reached new highs, the lack of a recovery in employment and falling household incomes mean that prospects for a full consumption recovery are not bright. Inflation is easing, despite elevated pork prices.
Monetary stimulus, which was needed during the outbreak, is now being withdrawn as the recovery is gaining momentum. Shadow banking has also picked up following a few years of decline. Increasing corporate defaults have sharpened risk pricing. Fiscal policy will remain supportive, with a number of tax cuts and extensions of social benefits promoting consumption amid weak consumer confidence. However, more ambitious structural reforms in the area of social protection, and a more equitable provision of public services, are needed for consumption to rebound. Infrastructure investment will remain robust, mainly benefitting state-owned enterprises as entry restrictions are being relaxed only slowly.
China’s “New Era” started with strong growth and per capita GDP will likely double by 2020 relative to 2010 , thus making a large contribution to the expansion of the world economy. According to long-term growth scenarios, until around 2030, China would contribute more to world growth than OECD countries. In that year, China’s share of world output would peak at 27%. In the recent couple of years, a greater focus has been put on the quality of growth rather than its pace, with early signs of success. Efforts have been made to stimulate domestic consumption and to avoid the worsening of macroeconomic imbalances. In the recent period, downward pressure on the economy has increased, partly as a result of escalating trade tensions, prompting the government to swiftly introduce stimulus measures to support growth.