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Economic conditions in China have changed dramatically over the past six months. The COVID-19 pandemic and measures taken to contain it have triggered a combined demand and supply shock. While supply side constraints have eased, weak domestic and external demand continues to restrain the pace of recovery, despite the

measures taken to contain the economic fallout. But with good policies, the recovery poses opportunities to further inclusive, sustainable and greener growth, according to Leaning Forward – COVID-19 and China’s Reform Agenda, the World Bank’s China Economic Update for July 2020.

The report projects that economic growth in China will slow sharply to 1.6 percent this year–marking the slowest expansion since 1976–before rebounding to 7.9 percent in 2021. Even as economic activity rebounds, the pace of China’s poverty reduction is expected to slow, reflecting slower growth in household incomes. Without additional policy measures, 8-20 million fewer people are projected to escape poverty in 2020, compared to pre-pandemic projections.

Risks to China’s economic outlook are unusually high. On the downside, recurrent COVID-19 flareups could continue to disrupt economic activity, despite efforts to suppress the spread of the virus. Externally, a deeper and more protracted global recession and escalating bilateral tensions between China and some of its main trading partners could also derail the recovery. On the upside, the downturn could be less severe if domestic and global confidence recover faster than anticipated, and if economic tensions de-escalate.

“While risks are exceptionally high, they can be partially mitigated by good policies,” said Martin Raiser World Bank Country Director for China. “The pandemic shock has exposed deeply connected economic, social, and environmental fragilities, further increasing the urgency of rebalancing the economy toward more inclusive, sustainable, and greener growth. The recovery offers an opportunity to accelerate progress towards these goals.”

Policymakers will need to ensure monetary and financial sector policies remain flexible to provide abundant liquidity and keep market rates and bond yields low, easing the debt burden on households, firms, and governments. Fiscal policies will need to play a critical role in supporting the recovery. Stimulus measures should be designed in a way that contributes to achieving more inclusive, carbon-neutral and greener growth.

“The pandemic has amplified the need to close gaps in China’s social safety nets both to support distressed workers and households, and to help minimize the lasting weakness of domestic consumption,” said Sebastian Eckardt, World Bank Lead Economist for China.

Enhancing market competition and reform of the hukou (household residency registration) system could help unleash a stronger market response, facilitate adjustment to post-COVID-19 economic realities, and support China’s longer-term growth prospects, according to the report.