It has projected that the country’s GDP growth will return to its pre-pandemic level by 2021 in response to improved consumer and business confidence and better labor market conditions.
The World Bank said that although the growth rate remained unchanged from its projection in the summer, China will have to navigate some near-term uncertainty. “A premature policy exit and excessive tightening could derail the recovery. Along with a flexible and supportive monetary policy, China could use its fiscal space to hedge against downside risks to growth and ensure a smooth rotation from public to private demand.”
The bank suggested that the special direct fiscal transfers to local governments (a new mechanism launched this year to ensure fiscal and bailout funds can be directly received by primary-level government departments and entities) could be extended through next year and explicitly targeted to increased social spending and/or green investment by local governments.
In terms of monetary policy China’s central bank should return to more conventional tools while phasing out window guidance, lending targets, and relending facilities adopted to provide targeted support in the context of the Covid-19 shock, said the report.
According to World Bank lead economist for China, Sebastian Eckardt, the country will need to embrace the growth potential of its most developed and innovative metropolitan areas and city clusters, to rebalance the economy from investment to more innovation- and services-driven growth.
“Such a shift will need to be accompanied by fiscal policies to ensure more equitable public service delivery and increased investment in human capital for people living outside urban areas and coastal provinces,” Eckardt said.
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