World Bank: Domestic demand key to China’s growth

4 Jun 19

China’s economy will need to rely on domestic demand to sustain rapid economic growth, say World Bank economists.

As growth rates slow amid growing global uncertainty and rising trade tensions, they have pointed to the positive potential value of stimulus measures.

Chinese policymakers still have catching up to do to improve levels of productivity and efficiency that will bring the country in line with higher-income economies, they add.

“In response to the growth moderation and less favourable external conditions, the government introduced a fiscal stimulus emphasising tax incentives,” said Martin Raiser, World Bank country director for China.

“While the central government has fiscal space to further increase spending, if necessary, the additional stimulus should be appropriately funded either directly at the central level or through additional fiscal transfers to the provinces.

“Higher spending on health, education, and social protection could help boost demand and improve the quality of services, if combined with reforms to increase efficiency.”

China’s economic growth has remained resilient in the face of high global uncertainty, with GDP growth 6.4% year on year in the fourth quarter of 2018 and first quarter of 2019, compared to 6.8% in the first six months of 2018.

The World Bank’s China Economic Update for May released last week points to the role domestic demand will play as the external environment becomes less favourable.

Trade tensions fuelled volatility in financial markets in early May as the US announced higher tariffs on imports from China, and the People’s Bank of China maintained what the World Bank described as a “prudent” monetary policy stance, with some targeted easing.

In 2018, lower VAT rates and import duties, higher export VAT refunds, and slower growth in personal income taxes contributed to a consolidated fiscal deficit of 3.9%, but this year tax cuts and higher local government borrowing limits will increase that to 5.9%.

Given the stimulus that is expected, the World Bank predicts growth in 2019 of 6.2%, but believes trade tensions, weaker business confidence, and slower global trade will push that down in 2020.

“Despite being among the global leaders in a number of technologies, China still has significant room for catching up to the aggregate productivity level of high-income countries and can continue to benefit from global integration,” said John Litwack, World Bank lead economist for China.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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