China cuts interest rate for the first time in 20 months 0:59
Hong Kong (CNN Business) -
The World Bank has cut its forecasts for China's economic growth this year and next, as the world's second-largest economy faces mounting headwinds from the new omicron variant to a severe recession of the real estate.
On China's economic growth, the bank now expects the country's GDP to expand 8% in 2021 compared to a year ago, that's lower than its previous forecasts.
(In October, the World Bank expected China to grow 8.1% this year. In June, it projected growth of 8.5%).
It also lowered its forecast for 2022 from 5.4% to 5.1%, which would mark the second slowest growth rate for China since 1990, when the country's economy rose 3.9% following international sanctions related to the 1989 Tiananmen Square Massacre. China's economic growth was 2.2% in 2020.
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"The downside risks to China's economic outlook have increased," the World Bank said in its latest report on China's economy on Wednesday.
Renewed domestic covid-19 outbreaks, including the omicron variant, could lead to more "broad-based and longer-lasting" restrictions and cause further disruptions to economic activity, he said.
Furthermore, "a severe and prolonged recession" in highly leveraged real estate could have significant repercussions throughout the economy, he added.
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China's economic growth has faced several crises
China was the only major economy to see growth in 2020, but this year it has been grappling with many threats to its expansion, including restrictions related to the pandemic, an energy crisis and an unprecedented crackdown on private companies.
A yearlong regulatory crackdown on technology, education and entertainment has hit stocks.
It also led to large layoffs among many companies, putting pressure on the labor sector even as it tries to recover from the pandemic.
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The additional regulations on real estate firms that began last year have added to the problems of major developers who already had too much debt.
The real estate sector, which accounts for almost a third of China's GDP, is now in a deepening depression, with big players on the brink of collapse.
Growing economic headaches have caused Beijing to reconsider its approach to politics.
During a key economic meeting earlier this month, Chinese President Xi Jinping and other top leaders pointed to "stability" as their top priority for 2022.
That's a big change from last year's meeting, when "curbing the disorderly expansion of capital" ruled the day.
Since then, authorities have stepped up efforts to boost the economy: The People's Bank of China cut its top interest rate on Monday for the first time in 20 months, hoping to cut borrowing costs for households and businesses and , in turn, encourage consumer spending and investment.
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Last week, the central bank also lowered the reserve requirement ratio for most banks by half a percentage point.
That move is expected to generate about 1.2 trillion yuan (US $ 188 billion) for commercial and domestic loans.
While the Chinese authorities should be prepared to ease fiscal policy and provide liquidity to stem risks to struggling builders, the World Bank argues that the traditional handbook of driving growth through infrastructure and real estate investment has "run its course" .
"To achieve quality growth in the medium term, China will need to rebalance its economy in several dimensions," he said.
That includes efforts to make China a consumer- and service-driven economy, allowing markets and the private sector, rather than state leadership and regulation, to play a greater role, and transitioning from a high economy to a high economy. low carbon.
"Addressing distortions in factor markets and further opening up the protected services sector would not only support the shift to more private sector-led growth, but would also encourage rebalancing towards higher value service jobs," said Ibrahim Chowdhury, World Bank Acting Chief Economist for China, in the statement on the country's economic growth.
To support the rebalancing, the bank suggested that China carry out tax reforms to create a more progressive tax system and boost social safety nets, encourage wider use of carbon prices and promote the development of green financial instruments.
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