China’s Covid-19 support ‘should focus on households rather than industry’

12 Jan 21

Lagging economic growth in China during the recovery from the Covid-19 pandemic could be resolved by shifting resources into areas such as the social safety net, the IMF has said.

After a visit to the country, IMF economists said they are concerned over a “lack of balance” in the country’s recovery, because it is mostly being propped up by public support rather than private consumption.

Although private investment has recently become stronger, consumption (households using goods and services) is lagging behind.

This, together with an expected drop in fiscal support from the government, has caused the IMF to lower its 2021 growth prediction for China to 7.9%, from 8.1% in November.

“With this outlook in mind, there are two recommendations that are central, we think, in the short term,” said Helge Berger, assistant director of the IMF’s Asia and Pacific Department.

“One is to make sure we do not withdraw macroeconomic policy support prematurely in China. This is advice that other countries are getting from the IMF, so this is a bit of a global concern, but it applies to China as well.

“The second implication of our analysis of the outlook and the risks around it is that we need to make sure we adjust the composition of macroeconomic support away from investment and towards household support.”

Berger said this would include improving the social safety net, for example, and would improve consumption by giving households more money to spend.

“If you look at what the social safety net in China is offering right now, a good example is the unemployment insurance,” he added.

“It exists, but its coverage is spotty: only one in three urban workers is covered by employment insurance, and one in five migrant workers.”

Berger said ensuring the credibility of welfare, such as unemployment insurance, will be important.

“You need to make sure it’s understood by households and it’s seen as credible by households,” he explained.

“Then you will get all the medium-term, more lasting shifts in consumer behaviour that come with households deciding, yes, we can trust the public safety net as an insurance in the next downturn, and we don’t have to go into precautionary savings as much as in the past.”

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