China must increase public spending

China needs to increase government spending to support a slowing economy due to coronavirus shutdowns and a slowdown in the real estate sector, according to the International Monetary Fund.

The policy suggestions came after the fund slashed its growth forecast for China in 2022 to 4.8%, with the report noting that risks to that forecast were “mainly on the downside”.

Economic recovery “lacks balance and momentum has slowed, reflecting rapid withdrawal of fiscal support, lagging consumption amid recurrent Covid-19 outbreaks despite successful vaccination campaign and slowing investment real estate,” the fund said in its annual report on the country’s economy.

“The combination of more frequent epidemics and a zero-Covid tolerance approach has forced China’s economic activity into a stop-and-go pattern” and this could “further delay the recovery of private demand”, according to the report.

The IMF has no reason to expect coronavirus outbreaks to become less frequent this year, Helge Berger, head of the IMF’s China mission, told a news conference ahead of the report’s release. . “That’s one of the main reasons we’ve lowered our guidance for the year,” he said.

Even though more than 80% of China’s population is vaccinated “it’s unclear whether this will allow for the gradual lifting of lockdowns” due to China’s zero-tolerance approach to epidemics, the IMF said in its report. report.

However, Berger refrained from calling on China to change its approach, suggesting instead that Beijing could “continue to refine the lockdown measures”.

The report adds that the Chinese authorities have “recognized that the Covid zero tolerance strategy has an impact on the recovery of private consumption, but have seen its benefits outweigh any economic costs”.

Government spending grew at the slowest pace in nearly two decades last year, suggesting limited fiscal support for an economy that has lost momentum sharply in recent months, with the IMF noting that fiscal policy has become “strongly restrictive” at the beginning of 2021.

The fund called on Beijing to bolster fiscal support for the economy by increasing spending on social services, and suggested the government prioritize spending on “targeted direct income support” over investment in infrastructure.

Increased spending on social services would help rebalance the economy towards consumption and the service sector, which “have regressed sharply in 2020 and normalization is expected to have remained slow in 2021,” the report said.

Fund administrators disagreed on whether China should ease monetary policy further, the IMF said, with some backing further monetary stimulus while others said the People’s Bank China should maintain the current accommodative stance.

The PBOC and commercial banks have cut rates and taken other measures this year to support lending and the economy. The central bank has also signaled it will take further action, saying earlier this month that it would open its toolbox to stimulate the economy.

The IMF pointed to China’s real estate sector as the other main reason for cutting its growth forecast. Activity and investment in the sector have slowed sharply due to Beijing’s efforts to reduce debt, with home prices and sales falling for months and a number of property developers defaulting on their debts.

“We see the tensions in the real estate sector continuing. You have to worry about this risk becoming more intensive in the sector and impacting the rest of the economy,” the IMF’s Berger said in an interview ahead of the report’s release.

The fund chastised China for “the lack of a clear, coordinated and well-communicated policy response to the financial stress faced by major property developers.”

The attempt to reduce indebtedness in the housing sector has led to a slowdown in investment, the fund said, calling on Beijing to provide financial support to property developers if tensions in the housing market threaten economic and financial stability.

“A sharper-than-expected slowdown in the real estate sector could trigger a wide range of negative effects on aggregate demand, with negative feedback loops on the financial sector and could generate international spillovers,” the fund said. –Bloomberg