Economy lacks balance and growth momentum has slowed

The International Monetary Fund (IMF) is making public its concern regarding the Chinese economy and the impact already being felt from the rapid withdrawal of fiscal support.

According to the multinational funding institution, China’s recovery is well advanced but it lacks balance and the momentum has slowed, resulting in lagging consumption amid recurrent COVID-19 outbreaks. This has come about despite a successful vaccination campaign, and slowing real estate investment following policy efforts to reduce leverage in the property sector.

In its latest Article IV review published yesterday, the IMF is reporting that “regulatory measures targeting the technology sector, intended to enhance competition, consumer privacy, and data governance, have increased policy uncertainty. China’s climate strategy has begun to take shape with the release of detailed action plans”.

The IMF says productivity growth is declining as decoupling pressures are increasing, while a stalling of key structural reforms and rebalancing are delaying the transition to “high-quality” – balanced, inclusive and green – growth. The funding agency argues that imbalances in the Chinese economy have worsened and delayed China’s transition to consumption-led growth.

IMF has slashed its outlook for the country this year

Given these prevailing concerns, the IMF has slashed its outlook for the country this year. The IMF assessment reflects growing concern among some economists and officials that greater state intervention in the economy could be hindering China’s long-held goal of “high-quality” growth – one driven by consumption rather than investment.

According to the IMF, “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”.

China’s leadership is likely to set a growth target of about 5.5 per cent for 2022, according to Chinese economists, who consult with the government.

While the figure might seem low for a country that has consistently boasted world-beating growth rates, it might still prove overly optimistic, given that economic expansion sharply decelerated to four per cent in the final quarter of last year. Some economists have questioned the rationale behind what they see as an ambitious growth target, as it inevitably would entail greater government spending on big-ticket projects, further pushing up China’s already-high debt levels.

Monetary and fiscal easing has been stepped up

To bolster sagging economic activities, Beijing has stepped up monetary and fiscal easing, cutting interest rates, prodding banks to lend and getting local governments to increase infrastructure-related spending. The IMF is recommending to the Chinese authorities to include allowing a higher fiscal deficit, which could let the government slash taxes on businesses, or a redirection of government resources toward households as opposed to more public investments.

However, China’s policy makers have so far been focused on using supply-side measures to boost production as opposed to taking steps to lift consumer spending in any meaningful way but the uneven recovery in China’s economy is also amplifying a trend of declining growth in productivity, or output per worker and unit of capital, according to the IMF report. China’s productivity growth has declined markedly in recent years, as the state sector gets bigger, crowding out private firms that tend to be nimbler and more profitable.

The IMF report shows that state-owned enterprises are, on average, only 80 per cent as productive as private firms in the same sector. Yet, state companies are playing an increasingly important role in China’s economy, with authorities turning to them to ensure supplies during the pandemic and implement Beijing’s technological self-sufficiency drive amid increased tensions with the West.

The IMF has called on China to carry out long-awaited state-sector reforms and to make it easier for private firms to compete with state companies. Beijing partly blames delays of such reform on a tense climate with major trading partners, primarily the US.