Dec 24, 2020 06:05 AM

China Shouldn’t Withdraw Stimulus too Soon, World Bank Warns

Pedestrians walk through the Lujiazui financial district in Shanghai
Pedestrians walk through the Lujiazui financial district in Shanghai

(Bloomberg) — China should maintain accommodative monetary policy and avoid any “significant contraction” in fiscal policy next year to keep its economic recovery from the Covid-19 pandemic on track, according to the World Bank.

“A premature policy exit and excessive tightening could derail the recovery,” the World Bank said in an economic update on China issued Wednesday. The world’s second-largest economy will grow 2% this year and 7.9% in 2021, and the biggest risk to the outlook remains a resurgence of coronavirus, the institution said.

Rising private-sector investment in manufacturing and stronger household spending will drive next year’s acceleration, the World Bank said. China’s Communist Party signaled at an annual economic conference last week that it will reduce some stimulus measures as the economy has resumed growth, saying it will avoid “sharp turns” in policy.

Beijing still has room to expand government spending even after China’s fiscal deficit grew to 5.9% of gross domestic product in the first 11 months of 2020, up from 3.5% last year, the World Bank said.

“China could use its fiscal space to hedge against downside risks to growth and ensure a smooth rotation from public to private demand,” it said, calling for more spending on social services and green investment.

Beijing should also increase the role of direct fiscal transfers to help local governments cover spending on energy-efficient buildings, reforestation, and electric vehicles and urban flood-control infrastructure.

“General transfers should be expanded further toward a fully funded financing pool for universal basic public services,” the World Bank said.

On monetary policy, the report advised Beijing to take an “accommodative” stance focusing on targeted measures rather than “general monetary tightening” to contain asset price inflation and speculative investment.

The World Bank estimates that monetary and fiscal stimulus implemented to combat the economic effects of the pandemic in China this year raised total debt in the economy by 27 percentage points to 288% of GDP at the end of the third quarter. External debt was equivalent to 20% of GDP, it said.

The report predicts that net exports will make almost no contribution to growth next year after a large increase in 2020 that swelled China’s trade surplus.

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