Growth in China has decelerated more than previously expected amid weakening industrial growth and cooling domestic and external demand. A more accommodative policy stance has helped to mitigate some of these effects and other external factors. However, China’s growth slowdown also reflects the deeper structural trends of declining returns to public investment, growing debt and rapid aging.
Growth is estimated to decelerate to 6.1 percent in 2019, and projected to moderate to 5.9 percent in 2020, and 5.8 percent in 2021, according to Cyclical Risks and Structural Imperatives, the December 2019 edition of the World Bank’s China Economic Update released today.
GDP growth slowed to 6 percent year-on-year in first three quarters of this year, down from 6.6 percent in 2018. Investment growth decelerated, weighed down by a combination of tighter domestic financing conditions, weaker investor confidence amid heightened trade policy uncertainty and softening external demand. Consumption growth—while slowing from the exceptionally high levels of 2018—has remained relatively resilient, supported by robust growth in real disposable income. Net exports made a positive contribution to growth reflecting the large contraction of import volumes, which more than offset the decline exports.
Short term risks remain tilted to the downside. Domestically, growth may suffer from the potential adverse effects of financial de-risking, given its asymmetric impact on private sector financing and the risk of a disorderly unwinding of excessive leverage. External risks include a sharper-than-expected slowdown in major economies, particularly in parts of Europe, and weaker global trade and investment.
“Policies need to be carefully balanced to reduce cyclical risks to growth while staying the course on the necessary deleveraging of the economy. This may require tolerating slower but safer growth in the short term,” said Martin Raiser, World Bank Country Director for China. “If downside risks lead to a sharp reduction in growth, the authorities have policy space to act, but this needs to be done in a way that is consistent with the desired rebalancing of the economy toward consumption, services, and private investment and with reducing financial and corporate sector risks.”
Over the medium-term, adverse structural factors, including a declining labor force and tepid productivity growth will continue to weigh on potential growth, in the absence of deeper structural reforms. The central, medium-term challenge remains the structural rebalancing from a credit-fueled and investment-led economy towards one which relies more on domestic consumption, services, private-investment, and productivity. To achieve this rebalancing, the market will need to play a more decisive role in allocating resources. To mitigate external risks, a permanent resolution of bilateral trade tensions would be essential.
“Sustained and deep structural reforms are necessary to stabilize potential growth and rebalance the economy, including measures to strengthen market competition and remove constraints to private sector investment in non-strategic sectors, especially services,” said Sebastian Eckardt, World Bank Lead Economist for China. “This would boost China’s long-term growth prospects, support investor confidence, and help diffuse bilateral trade tensions”