IMF lifts China’s GDP to 8.4 %, but Gita Gopinath says growth unbalanced

The International Monetary Fund has increased China’s GDP projection to 8.4% for this year, a 10-year high, but its chief economist Gita Gopinath cautioned that economic growth in the world’s second largest economy was unbalanced and private consumption has not recovered as fast as expected following the coronavirus crisis.

The IMF also urged China to address its high corporate debt levels resulting from the easy monetary policy put in place during the coronavirus pandemic.

In its latest issue of the World Economic Outlook released in Washington, the IMF put China’s 2021 growth at 8.4%, up 0.3 percentage points from its January forecast.

Its projection for China’s economic expansion for 2022 remains unchanged at 5.6%, official media here reported on Wednesday.

The IMF forecast for China, though much higher compared to other major economies including the US, Germany and France, is lower than 12.5% growth rate for India in 2021. The 8.4% projection is above 6% target fixed by the Chinese government for this year.

China’s economy, which was the first to be hit by the coronavirus pandemic and early to recover from its impact, grew 2.3% in 2020, registering the lowest annual growth rate in 45 years.

The Gross Domestic Product (GDP) of the world’s second-largest economy grew by 2.3% expanding to $15.42 trillion in 2020, according to the data released by China’s National Bureau of Statistics (NBS).

In the local currency, the GDP exceeded 100-trillion-yuan threshold to 101.5986 trillion yuan.

“With global growth being stronger, you have more exports. The US rescue plan also will increase demand for China’s goods,” said Gita Gopinath, the IMF’s chief economist and director of research.

She, however, viewed China’s growth as somewhat unbalanced.

“It’s still very heavily reliant on public investment. And private consumption has not recovered as fast as we would have hoped,” Ms. Gopinath was quoted by the South China Morning Post.

To “make this a durable recovery, our hope is that fiscal measures and other support measures would work in the direction of supporting the recovery coming from the private sector, as opposed to the public sector,” she added.

China-US tensions that remain elevated on multiple fronts, ranging from international trade to intellectual property and cybersecurity, also got a mention in the report.

“Domestic economic disparities arising from the pandemic downturn may also prompt new trade barriers…Amid already high levels of trade restrictions, such actions would add to inefficiencies and weigh on the recovery. Furthermore, risks of protectionist tendencies surrounding technology are emerging,” the IMF report said.

The IMF has also advised China to further address its high corporate debt levels that have resulted from the easy monetary policy put in place during the coronavirus pandemic.

“China, of course, has re-emerged from the crisis more quickly than any other country. The measures that were taken were very quick and very effective,” Tobias Adrian, financial counsellor at the IMF, said while releasing the report.

“But the measures that were deployed have led to [a] further increase in leverage and vulnerabilities,” he was quoted as saying by the Post.

China’s financial authorities, the IMF financiers said, should move away from providing easy access to capital to rein in corporate debt risks.

According to an IMF report on global financial stability released on Tuesday, the vulnerabilities in China were particularly “driven by riskier corporate borrowers”.

China made it easier for businesses to borrow during the pandemic to keep them and the economy afloat. Companies large and small borrowed at a rapid pace and the loans went to many struggling firms.

The nation’s debt-to-GDP ratio rose to 266.4% at the end of the third quarter in 2020, up from 245.4% a year earlier, according to the Chinese Academy of Social Sciences (CASS), a State Council-affiliated think tank. It expects the ratio to hit 275% for the whole of 2020.

This has exacerbated the debt problem that existed before the pandemic, the Post said.

Pre-Covid, many Chinese firms received favourable pricing on their bonds and loans because of implicit guarantees, as governments at various levels provided backstops to local borrowers to attract investors.

Among the debt issued by companies that had two years of operating losses before the pandemic, more than two-thirds had credit spreads that implied a relatively low risk of default, the report said.

The spreads, the difference in yield between the government and the corporate debt, were distorted by the implied government guarantee, not the soundness of the business, the report said.

Several unexpected defaults of state-owned enterprises in the fourth quarter of 2020 have raised investor concerns about the presumed guarantees for weaker borrowers. That has started to translate into an uptick in future default risks, the report said.

China Banking and Insurance Regulatory Commission (CBIRC) warned in July last year that potential financial risks remain high, while urging precautions to be taken in advance for a possible spike in non-performing loans (NPLs).

In a release, the commission listed several apparent risks and challenges, including growing NPLs, deteriorating asset quality in small and medium-sized financial institutions and the resurgence of shadow banking.

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