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The Pandemic’s Impact on China’s Growth Prospects

While a policy failure is largely responsible for China’s disappointing growth in the second quarter of 2021, a policy change might not be enough to get the economy back on track. Instead, China’s economic recovery may well depend, above all, on how the fight against COVID-19 unfolds.

BEIJING – In the second quarter of 2021, China’s GDP grew by 7.9% year on year. That was a relatively strong performance, especially given the enduring effects of the COVID-19 pandemic on the global economy. But, for China, it represents a disappointment: a Caixin survey of economists showed the median estimate for the second quarter was 8.2% growth.

Chinese economists broadly agree that China’s potential growth rate is 6%. So, taking into consideration the base effect, China’s year-on-year growth rate in the four quarters of 2021 should be 19.1%, 8.3%, 6.7%, and 5.5%. Yet, in the first quarter, growth amounted to 18.3%. This weaker-than-expected performance is, to a significant extent, a result of official policy.

While Chinese authorities implemented expansionary fiscal and monetary policy early in the pandemic, they proved eager to normalize it, for fear that it would fuel inflation and compound financial risks. Fiscal retrenchment has been particularly rapid. In the first half of 2021, China’s general government expenditures increased by only 4.5%, while revenues increased by 21.8%. Though this partly reflects the base effect, policy was undeniably tightened. In fact, in the first half of 2021, China’s public budget deficit was CN¥1.6 trillion ($247 billion) smaller than in 2020.

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