China’s recovery has broadened as economic activity has continued to normalise, the World Bank said, adding that its economic growth is projected to reach 8.5 percent this year before slowing to 5.4 percent in 2022, as low base effects dissipate and the economy returns to trend growth.
Improved consumer and business confidence and better labor market conditions will support a shift towards private domestic demand from public investment and exports. On the supply side, the drivers of economic growth are expected to gradually transition from industrial production toward services, according to the latest China Economic Update released today by the World Bank.
Risks to China’s economic outlook are broadly balanced. On the downside, repeated COVID-19 outbreaks could disrupt economic activity, despite efforts to suppress the spread of the virus. Bilateral tensions with key trading partners and financial stability risks associated with high corporate leverage and inflated property markets could also derail growth prospects. On the upside, a more robust recovery of private consumption and investment together with a stronger and more broad-based global upturn could support stronger growth.
“As China’s recovery consolidates, macroeconomic policies are expected to shift from accommodative to more neutral settings,” said Martin Raiser World Bank Country Director for China, adding that the pace of policy normalisation, however, should continue to be data-dependent and calibrated to the strength of the recovery in China and the rest of the world.
According to the World Bank, China faces several medium-term challenges, including demographic headwinds, slowing productivity growth, a high level of inequality and remaining social vulnerabilities and a carbon intensive production structure. Despite a strong economic recovery some of these challenges have been exacerbated by COVID-19.
“Over the medium term, policymakers should redouble their efforts toward promoting growth-enhancing structural reforms and steering the economy onto a greener, more resilient, and inclusive development path,” said Sebastian Eckardt, World Bank Lead Economist for China.
A set of mutually reinforcing reforms could help achieve high quality growth, including a more progressive tax system, investments in human capital and stronger social safety nets to reduce income inequality. A wider use of carbon pricing together with scaled-up green investments could support a transition to low carbon growth with broad benefits. Structural reforms, such as enhancing market access, including in relatively closed service sectors, would also help increase competition, encourage innovation and boost productivity growth, the World Bank said.