IMF Praises China’s ‘Decisive’ Macroeconomic Policy Moves
The International Monetary Fund (IMF) praised China for taking “decisive” measures to bolster the economy in the wake of the Covid-19 pandemic and urged policymakers to stay vigilant and be ready with additional macroeconomic moves in the case of a return of the virus and further slowing in global growth.
China was hit hard by the outbreak in the first quarter, but authorities took strong action to contain the virus, an important factor behind the flattening of the infection curve and turnaround of the economy, Kenneth Kang, deputy director of the IMF’s Asia & Pacific Department, said in an interview with Caixin.
Kang applauded the Chinese central bank’s decisive injection of liquidity into the banking system, reduction of policy rates, and expansion of relending and rediscounting facilities for sectors and small and medium-size enterprises hit hard by the pandemic.
These swift actions helped stabilize domestic financial markets and support activity, Kang said. But if the recovery falls short, authorities should stand ready to provide more fiscal and monetary policy support, Kang said.
“China has the fiscal space to do more if needed,” he said. In addition to supporting the medical response, fiscal measures should build on efforts to rebalance the economy and foster long-term sustainable growth, including more spending to improve the public health system and the social safety nets and more investment to foster green growth while avoiding general, inefficient, large-scale investment, Kang said.
The IMF expects China’s growth to rebound in the second quarter and continue to recover in the second half of this year as the containment measures are withdrawn and policy support gains strength. The IMF’s outlook for China in 2021 is GDP growth of 9.2%, the highest in the world and the most in a decade.
That estimate assumes a sharp recovery from an extremely low base in 2020 with subdued growth estimated at 1.2% and depends critically on the pandemic fading in the second half of 2020, according to the IMF.
As exports still account for about 18% of China’s GDP, weaker global growth is a significant headwind, Kang said. Another drag is the collapse in global tourism and travel expected this year, he said.
There is huge uncertainty about 2020 growth prospects, and even more so about the 2021 outlook, Chang Yong Rhee, director of the IMF’s Asia and Pacific Department, wrote Wednesday in a blog.
Growth in Asia is expected to stall at zero in 2020, the worst in almost 60 years, and China’s slowdown is a key factor shaping the outlook for Asia, Rhee said.
During the 2009 global financial crisis, China’s growth was little changed at 9.4% thanks to fiscal stimulus amounting to about 8% of GDP.
“We cannot expect that magnitude of stimulus this time, and China won’t help Asia’s growth as it did in 2009,” Rhee said.
The IMF called for China to continue to contribute to global solutions to fight the virus outbreak by increasing its production capacity of critical medical equipment and supporting international efforts to provide debt relief for low-income countries.
China has ample foreign reserves at more than $3 trillion, and external debt is low, Kang said. China also maintains a network of bilateral swap arrangements with around 30 countries around the world, including in Asia. China should stand ready to activate these swap lines if needed to facilitate global trade and investment, Kang said.
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