Opinion: Let Market Forces Spearhead China's Post-Pandemic Growth
Geoffrey Okamoto is the first deputy managing director of the International Monetary Fund. This article, edited for length, was his speech delivered at Thursday’s Forum on National Affairs in Beijing, hosted by the Counselor’s Office of the State Council.
The Covid-19 pandemic has left its mark on the global economy. In June, the IMF cut its global growth forecast to - 4.9 percent this year. And we estimate that, over two years, the world economy will suffer a dramatic loss of more than $12 trillion.
The good news is that, after the Great Lockdown, we now see many economies reopening. Global economic activity has started to gradually strengthen, and we now expect a partial and uneven recovery in 2021. It means that countries will recover at different speeds, and we expect output levels to remain well below pre-pandemic trends over the medium term almost everywhere.
But tremendous uncertainty around our forecast continues. Prolonged disruption because of the virus is our greatest concern—and there are other risks, from geopolitical and social tensions to volatile financial markets. Of course, medical breakthroughs on vaccines and treatments could lift confidence and economic activity. But I fear, at this point, downside risks dominate.
It will take a strong joint effort to put the pandemic firmly behind us—and China has an important leadership role to play. Many countries are already benefitting from increased supplies of medical and protective equipment, as well as debt relief.
Many more people in this nation and around the world will benefit if China’s recovery supports sustainable “green” growth. And working with its trading partners, China can help the global trade and investment system adjust to the changes in the global economy.
The key is to build on the progress achieved in recent months.
China’s policy response is key for the recovery
China’s example shows that, with the right policies in place, there is light at the end of the tunnel.
The speed and extent of the recovery—from negative 6.8 percent real GDP growth in the first quarter to positive 3.2 percent in the second quarter—is astonishing. And by all indications, this recovery continues in the third quarter.
This didn’t happen by accident.
Fiscal, monetary, and financial measures helped mitigate the negative economic impact, especially on the most vulnerable. Think of how the People’s Bank of China established lending facilities with a capacity of more than 2 trillion yuan to fund loans for small businesses, poverty alleviation, and agricultural firms. And think of how China’s regulators encouraged forbearance of small business loans.
Fiscal policy—helped by monetary policy and still-easy financial conditions—is providing critical growth support as households and private firms slowly normalize activity. State-owned enterprises (SOEs) are also supporting employment, increasing investment, and helping small and medium enterprises (SMEs) in their supply chains.
And yet, even in China, full recovery will take time. And the pandemic has brought old structural challenges to the fore. If left unaddressed, these challenges could delay the handoff from government-supported recovery to private demand-driven, self-sustaining growth.
For example, private investment and consumption are lagging. They are held back by repeated local outbreaks, continued social distancing, and slowly improving labor market conditions. Domestic demand is also affected by the limited capacity of social safety nets. The bottom40 percent of households hold only about 5 percent of total financial assets, which means they lack the funds to offset their income losses.
While necessary during the crisis, some of the unconventional policy support could threaten hard-won progress in structural reforms. Here the goal is to find the right balance between maintaining economic lifelines to viable businesses and preventing “zombie” companies from undermining competitiveness and long-term growth prospects.
Moreover, rising debt levels and financial vulnerabilities in smaller banks could undo some of the recent progress made in reducing risks to financial stability.
Path to resilient recovery and rebalancing
Despite these challenges, I am hopeful that the same determination and focus China demonstrated in fighting the first phase of the pandemic will help steer the economy towards a resilient recovery.
The key will be continuing to lend public support in the short term, while letting market forces spearhead growth over the medium term. How? Let me highlight four priorities:
First—there is room to calibrate macroeconomic support. Because of the continuing uncertainties around the outlook, it will be critical to phase out economic lifelines gradually. This can be done as demand from private investors and consumers strengthens. Given high and rising private and public debt levels, the focus would need to be on households—giving them the means and confidence to increase consumption.
For example, with less than half of the urban labor force—and less than 20 percent of migrant workers—covered by unemployment insurance, it is understandable that many consumers hold back on spending. Strengthening social safety nets will lift demand and support the recovery—and it will make the recovery more sustainable and balanced [by helping lower China’s savings rate and reliance on investment].
Second—there is room to further strengthen financial stability. With the recovery underway, the unconventional solvency support through regulatory forbearance can be gradually phased out. Instead, micro- and macroprudential policies can help prevent the build-up of systemic risks. Regulatory reforms in the asset management sector could be stepped up. Capital buffers of banks could be further bolstered and progress towards a consistent bank resolution framework will be critical.
Third—there is room to lift productivity, especially in the service sector. This can mean further measures to open up non-strategic sectors and lowering barriers to entry for private firms. And winding down non-viable SOEs and improving governance. In the labor market, it means improving the mobility of workers through hukou and land reforms—this will support macroeconomic rebalancing, while helping workers move where job availability is the highest.
I know the State Council has championed reforms along these lines —including a commitment to establish competitive neutrality among firms. Markets are at their best when they can decide where to deploy resources most productively. IMF research shows that young and private firms tend to be more productive—so, creating conditions for these firms to thrive remains critical.
Finally—there is room to promote sustainable “green” growth . This is an area where China has made significant progress in recent years, and it can now build on its leadership role. This means seizing the opportunity of low oil prices to further improve carbon pricing or introduce carbon taxes. It also means scaling up investments in climate-resilient infrastructure and green technology—these investments can boost employment now, while increasing economic and environmental resilience for decades to come.
This is important for everyone, here in China and across the world. We all were saddened by the tragic loss of life from the past summer’s floods in China. The economic costs were in the tens of billions of dollars. And other countries have seen even worse devastation. But we know there are so many opportunities to promote a robust and green recovery from the crisis—if we start now.
And let us not forget that, by implementing these reforms simultaneously, we can amplify their benefits. Accelerating the opening up of the service sector can help absorb employment losses from SOE reform. Winding down non-viable companies means more available credit for the private sector, including SMEs. And boosting carbon tax revenues creates room in the budget that could help finance an expanded social safety net.
Achieving these goals is not an easy task. But success will both secure China’s robust recovery and generate positive spillovers for the global economy. We at the Fund are looking forward to working with you to better understand the economic challenges presented by the pandemic. Our China team will conduct their annual “Article IV” visit in the fall, and our collaboration on capacity development continues—in a virtual format.
The pandemic is a powerful reminder that no country can succeed alone. The IMF, for its part, has provided emergency financing at unprecedented speed and scale, and we are ready to provide further support to a wider range of low- and middle-income countries. We also expect to triple in size our zero-interest credit to low-income countries in order to help them meet their large financing needs in this time of crisis.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
If you would like to write an opinion for Caixin Global, please send your ideas or finished opinions to our email: email@example.com
Support quality journalism in China. Subscribe to Caixin Global starting at $0.99.
- MOST POPULAR