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IMF Tempers Its Medium-Term Economic Growth Forecast for China

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The International Monetary Fund has slashed its medium-term growth forecast for China even though it bumped up its 2023 projection for the world’s No. 2 economy, underscoring the persistent economic challenges Beijing faces despite its recent change toward a more pro-growth tone.

The IMF now expects that in five years, China will grow at an annual rate of 3.8%, according to its latest assessment of the Chinese economy in its Article IV review released Friday, down from the fund’s October projection of 4.6%.

Earlier this week, the IMF announced that it had raised the estimate for China’s expansion this year by 0.8 percentage point to 5.2%, citing the country’s faster-than-expected lifting of strict Covid restrictions and a potential recovery in private consumption. 

Official Chinese data put China’s growth at 3% last year, one of its slowest rates in decades.

Having secured a third five-year term in power, President

Xi Jinping

recently has shown some willingness to adjust policies to bolster growth. Over the past couple of months, he has abruptly dismantled his zero-Covid policy that featured harsh lockdowns and mass testing, loosened financing restrictions on property developers and instructed underlings to signal an end to the government’s regulatory clampdown on the private tech sector.

The IMF’s more pessimistic outlook for China’s medium-term prospects reflects the combination of a shrinking population and declining growth in productivity, or output per worker and unit of capital.

A grocery store in Beijing. The IMF forecast China’s economy will expand 5.2% this year following the end of its zero Covid policy.



Photo:

mark r cristino/Shutterstock

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.

IMF research has shown that state-owned enterprises are, on average, only 80% 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 U.S.-led West.

“SOEs are being tasked to make advances in strategically important sectors and technologies affected by growing geoeconomic pressures, further burdening them with responsibilities,” the IMF review said.

The fund has called on Beijing to carry out long-stalled state-sector reforms and to make it easier for private firms to compete with state companies.

So far, Beijing has shown few signs of moving in that direction. According to the IMF report, Chinese authorities responded to the fund’s recommendations by repeating their commitment to so-called mixed-ownership reform that they said would “help introduce strategic investors and encourage different types of capital to draw on each other’s strengths.”

The original idea of “mixed-ownership reform,” dating back to the late 1990s, was to encourage private capital to invest in state firms, bringing more private-sector acumen to China’s bloated state sector. 

Under Mr. Xi’s leadership over the past decade, however, the process often works the other way around, with big state companies absorbing smaller ones to keep them going, and reconfiguring the smaller firms’ strategies to serve the state.

In another worrisome sign for the Chinese economy, the country’s population shrank last year for the first time since the early 1960, marking the start of a long-term population decline.

The tectonic demographic shift would pressure China’s pension system and an already-troubled housing market, threatening the leadership’s goal, announced in 2020, of expanding the country’s wealth and doubling the size of the economy by 2035.

For instance, according to China economist

Larry Hu

at

Macquarie Group,

while every 10 working-age Chinese supported one retiree in 2002, that ratio fell to five in 2021 and would drop further to four in 2030.

The IMF has recommended that Beijing gradually lift the retirement age to 65 and invest more in human capital. China has long allowed men to retire at 60 and women at 55 or earlier.

Overall, reforms aimed at enhancing productivity would imply average growth rates of about 4.5% and 4.75% between 2023 and 2027, according to the fund.

For the near term, China also faces headwinds to growth. 

“We project China to rebound strongly this year,” said Sonali Jain-Chandra, the IMF’s new China mission chief, in an interview. “But there are some pressing downside risks.”

Ms. Jain-Chandra said risks including renewed waves of Covid infections, a continued real-estate downturn and a potential rise in inflation could set back China’s recovery in 2023.

Recent pro-growth discussions in Beijing offered “good and welcome signs” that the government is pivoting toward propping up economic activities, she said, adding, “We look forward to hearing about specific measures underpinning the implementation of this policy vision.

Write to Lingling Wei at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


The International Monetary Fund has slashed its medium-term growth forecast for China even though it bumped up its 2023 projection for the world’s No. 2 economy, underscoring the persistent economic challenges Beijing faces despite its recent change toward a more pro-growth tone.

The IMF now expects that in five years, China will grow at an annual rate of 3.8%, according to its latest assessment of the Chinese economy in its Article IV review released Friday, down from the fund’s October projection of 4.6%.

Earlier this week, the IMF announced that it had raised the estimate for China’s expansion this year by 0.8 percentage point to 5.2%, citing the country’s faster-than-expected lifting of strict Covid restrictions and a potential recovery in private consumption. 

Official Chinese data put China’s growth at 3% last year, one of its slowest rates in decades.

Having secured a third five-year term in power, President

Xi Jinping

recently has shown some willingness to adjust policies to bolster growth. Over the past couple of months, he has abruptly dismantled his zero-Covid policy that featured harsh lockdowns and mass testing, loosened financing restrictions on property developers and instructed underlings to signal an end to the government’s regulatory clampdown on the private tech sector.

The IMF’s more pessimistic outlook for China’s medium-term prospects reflects the combination of a shrinking population and declining growth in productivity, or output per worker and unit of capital.

A grocery store in Beijing. The IMF forecast China’s economy will expand 5.2% this year following the end of its zero Covid policy.



Photo:

mark r cristino/Shutterstock

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.

IMF research has shown that state-owned enterprises are, on average, only 80% 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 U.S.-led West.

“SOEs are being tasked to make advances in strategically important sectors and technologies affected by growing geoeconomic pressures, further burdening them with responsibilities,” the IMF review said.

The fund has called on Beijing to carry out long-stalled state-sector reforms and to make it easier for private firms to compete with state companies.

So far, Beijing has shown few signs of moving in that direction. According to the IMF report, Chinese authorities responded to the fund’s recommendations by repeating their commitment to so-called mixed-ownership reform that they said would “help introduce strategic investors and encourage different types of capital to draw on each other’s strengths.”

The original idea of “mixed-ownership reform,” dating back to the late 1990s, was to encourage private capital to invest in state firms, bringing more private-sector acumen to China’s bloated state sector. 

Under Mr. Xi’s leadership over the past decade, however, the process often works the other way around, with big state companies absorbing smaller ones to keep them going, and reconfiguring the smaller firms’ strategies to serve the state.

In another worrisome sign for the Chinese economy, the country’s population shrank last year for the first time since the early 1960, marking the start of a long-term population decline.

The tectonic demographic shift would pressure China’s pension system and an already-troubled housing market, threatening the leadership’s goal, announced in 2020, of expanding the country’s wealth and doubling the size of the economy by 2035.

For instance, according to China economist

Larry Hu

at

Macquarie Group,

while every 10 working-age Chinese supported one retiree in 2002, that ratio fell to five in 2021 and would drop further to four in 2030.

The IMF has recommended that Beijing gradually lift the retirement age to 65 and invest more in human capital. China has long allowed men to retire at 60 and women at 55 or earlier.

Overall, reforms aimed at enhancing productivity would imply average growth rates of about 4.5% and 4.75% between 2023 and 2027, according to the fund.

For the near term, China also faces headwinds to growth. 

“We project China to rebound strongly this year,” said Sonali Jain-Chandra, the IMF’s new China mission chief, in an interview. “But there are some pressing downside risks.”

Ms. Jain-Chandra said risks including renewed waves of Covid infections, a continued real-estate downturn and a potential rise in inflation could set back China’s recovery in 2023.

Recent pro-growth discussions in Beijing offered “good and welcome signs” that the government is pivoting toward propping up economic activities, she said, adding, “We look forward to hearing about specific measures underpinning the implementation of this policy vision.

Write to Lingling Wei at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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