The IMF raised China’s GDP forecast for this year to 8.4%, a 10-year high, but warned that the world’s second largest economy’s growth was unbalanced and private consumption had not recovered as quickly as anticipated following the coronavirus crisis. The IMF also urged China to resolve its high corporate debt levels, which were a result of the easy monetary policy implemented during the coronavirus pandemic. The IMF forecasted 8.4% growth for China in 2021 in its most recent World Economic Outlook, published in Washington, up 0.3% points from January’s forecast. Official media here announced on Wednesday, that the IMF’s forecast for China’s economic growth in 2022 remained unchanged at 5.6%. Though, much higher than other major economies such as the United States, Germany, and France, the IMF’s forecast for China in 2021, is lower than India’s 12.5 percent growth rate. The forecasted growth rate of 8.4% is higher than the Chinese government’s expectation of 6% for this year.
China’s economy grew 2.3% in 2020, the lowest annual growth rate in 45 years, despite being the first to be affected by the coronavirus pandemic, and the first to rebound from its effects. According to data released by China’s National Bureau of Statistics, the world’s second-largest economy’s Gross Domestic Product (GDP) increased by 2.3% in 2020 to USD 15.42 trillion. GDP reached 101.5986 trillion yuan in local currency, surpassing the 100-trillion-yuan mark.
“You have more exports now that global growth is higher”,according to Gita Gopinath, the IMF’s chief economist and director of research, the US rescue plan would increase demand for China’s goods. China’s rise, on the other hand, was unbalanced in her opinion. It also relies heavily on government funding. The Hong Kong-based South China Morning Post quoted Gopinath as saying, that “private consumption has not recovered as quickly as we had hoped”. “Our expectation is that fiscal and other support initiatives will operate in the direction of promoting the recovery from the private sector, rather than the public sector, to make this a long-term recovery, he said. Tensions between China and the United States, are still high on a number of fronts, including international trade, intellectual property, and cybersecurity”, according to the study.
“The IMF has also advised China to further address its high corporate debt levels that have resulted from the easy monetary policy put in place during the coronavirus pandemic. China, of course, has re-emerged from the crisis more quickly than any other country. The measures that were taken were very quick and very effective”, Tobias Adrian, financial counsellor at the IMF, said while releasing the report. The IMF also urged China to resolve its high corporate debt levels, which were exacerbated by the easy monetary policy implemented during the coronavirus pandemic. Of course, China has recovered faster than any other country from the crisis. The actions were swift and successful in a statement released by the IMF, Tobias Adrian, a financial counsellor.
However, the steps that were implemented have resulted in [an] rise in leverage and vulnerabilities, he was quoted by the Post as saying. According to IMF economists, “China’s financial authorities should stop allowing easy access to capital in order to reduce corporate debt risks. China’s weaknesses were “led by riskier corporate borrowers,” according to an IMF study on global financial stability released on Tuesday. During the pandemic, China made it easier for companies to borrow in order to keep them and the economy afloat. Large and small businesses lent at a rapid rate, with much of the loans going to distressed businesses. According to the Chinese Academy of Social Sciences (CASS), a State Council-affiliated think tank, the country’s debt-to-GDP ratio rose to 266.4% at the end of the third quarter in 2020, up from 245.4 percent a year earlier. For the entire year of 2020, the ratio is expected to reach 275%.
The debt crisis that existed prior to the pandemic has now been aggravated. Many Chinese companies benefited from favourable bond and loan pricing prior to Covid because of implicit guarantees given by governments at various levels, to local borrowers in order to attract investors. More than two-thirds of debt issued by firms, that had two years of operating losses before the pandemic, had credit spreads that indicated a low risk of default, according to the report. The implied government guarantee, rather than the business’s soundness, skewed the spreads, which are the difference in yield between government and corporate debt, according to the study.
In July of last year, the Hina Banking and Insurance Regulatory Commission (CBIRC) issued a warning that potential financial risks remain high, recommending that steps be taken ahead of time to avoid a possible increase in non-performing loans (NPLs). Investors are concerned about the assumed guarantees for poorer creditors, following many sudden defaults by state-owned enterprises in the fourth quarter of 2020. According to the study, this has started to translate into an increase in potential default risks. Growing NPLs, deteriorating asset quality in small and medium-sized financial institutions, and the revival of shadow banking are among the risks and challenges mentioned by the commission in a press release.
