Growth in China: The road ahead
China’s economic development has been remarkable. Over the past 25 years, China’s real GDP grew by more than 8 percent a year, living standards rose dramatically, and extreme poverty was eradicated. China is now the world’s second-largest economy in US dollar terms. Developments in China, thus, have a big impact on the world. For example, last year China accounted for one-third of world growth.
China’s success in achieving strong and sustainable growth is thus good for China and good for the global economy. This is especially true now, with the global economy having large scars from the COVID-19 pandemic. Thus, the recent International Monetary Fund report on China focused on securing strong and sustainable growth.
In the near term, the main challenge is to secure the economic recovery. After growing 3.0 percent in 2022, the Chinese economy’s growth rebounded to 5.2 percent in 2023. China, like the rest of the world, saw large output losses during the pandemic. By the end of 2023, real GDP was 4 percent below prepandemic forecasts. Unlike the rest of the world, however, China is also undergoing a huge adjustment in the property sector.
Rightsizing real estate is both welcome and necessary, with a key near-term challenge being to minimize the costs of adjustment. Coming into the pandemic, the real estate market was out of balance with supply exceeding underlying demand by a large amount. The real estate sector also accounted for a large share of the economy (20 percent of value added if related industries are included), and was a big source of local government revenue, the largest asset for most households, and, despite excess supply, expensive.
IMF staff estimate that underlying demand is likely to fall over the next decade by about 35-55 percent compared with the last decade. Starts and sales have already adjusted by about this much, but it will still take time to work through existing inventories and finish the adjustment.
Further policy actions would accelerate the real estate recovery. The authorities have taken welcome measures. This includes encouraging bank lending to complete unfinished housing, expanding eligibility for first-time homebuyer benefits, lowering down payments, and allowing refinancing of existing mortgages. More can be done.
First, address stressed property developers by accelerating the exit of unviable developers and helping viable developers repair their balance sheets.
Second, solve the presale problem by reforming the model and providing more central government financing for housing completions.
Third, ensure that prices can move enough to clear the market.
And, fourth, expand access to housing, including through support for public and rental housing. Success in these areas would speed up and smooth the adjustment to a new equilibrium in real estate.
Macroeconomic policies can support the economy and help offset the drag from real estate. Fiscal policy can lift demand by rotating spending away from off-budget investment toward support to households, increasing aggregate demand.
Meanwhile, monetary policy can also be more supportive. With inflation low and output below potential, more easing is warranted, preferably through further cuts in interest rates.
The above referred to the near term, but it is just as important to achieve strong and sustained growth over the medium term. China, like much of the rest of the world, experienced a significant drop in total factor productivity following the global financial crisis — though China’s decline was sharper. Extrapolating these developments forward and accounting for demographics, our forecast is for China’s growth to slow to 3.5 percent over the medium term, which is basically the average growth for countries at a similar income level.
With comprehensive policy reforms, China could grow considerably faster. Our analysis shows that accelerated reforms to enhance the role of the market and boost total factor productivity could lift growth by 1 percentage point a year — translating to growth of 4.5 percent over the medium term. Pro-market reforms can give the market a more decisive role in the economy, including allowing greater enterprise entry and exit (improving business dynamism and fostering innovation) and reducing local protectionism.
Ensuring competitive neutrality would help close the productivity gap between State-owned and private enterprises. Monetary and financial sector policies could support a more efficient allocation of resources, including by strengthening the insolvency and restructuring frameworks. Importantly, faster growth in China would also benefit other economies. Our research shows that a 1 percentage point increase in China’s growth boosts GDP by 0.3 percentage point on average in other economies over the medium term.
Lastly, and critically, it is necessary to secure growth that is environmentally sustainable. China has made welcome progress toward meeting its climate goals and is on track to peak its carbon emissions before 2030. It has the world’s largest installed capacity of renewable energy and is set to over-achieve its Nationally Determined Contribution target of renewable capacity and raise non-fossil fuels’ share in energy consumption by 2030.
At the same time, China is still one of the largest emitters of CO2 and thus the speed of its decarbonization is crucial for addressing the global climate crisis. China’s continued and growing leadership to address the global climate crisis is thus both welcome and vital. As with growth, China’s success in greening the economy will be a win for China and a win for the world.
Fiscal policy can lift demand by rotating spending away from off-budget investment toward support to households, increasing aggregate demand.