Recently, the World Bank released the latest China Economic Bulletin. Affected by the COVID-19 epidemic, China's economic growth will slow to 1.6 per cent this year, but will pick up to 7.9 per cent in 2021, the report said.

It is worth noting that although the 1.6 per cent forecast is the slowest pace since 1976, it is already the only major economy to maintain positive growth, and this forecast is more optimistic than IMF's forecast for China's economy to grow by 1 per cent this year.

The report also points out that although China's economy still faces risks such as recurrent epidemics, global recession and geopolitical factors, it can be mitigated by releasing policy dividends. Specifically, policymakers need to ensure that monetary and financial sector policies remain flexible to ensure adequate liquidity, low market interest rates and bond yields, and reduce the debt burden on households, businesses and governments. Fiscal policy also needs to play an important role in supporting economic recovery.

After the release of the report, Tencent had an exclusive video conversation with Sebastian Eckardt, chief economist of the China Bureau of the World Bank. He said in the dialogue that China's economy will continue to recover in the second half of this year, but the pace may slow, mainly because domestic demand is still weak and the recovery in some industries is still slow. Due to the impact of a low base and the dissipation of epidemic factors, China's economy is expected to achieve the highest GDP growth rate in nearly a decade next year.

So, in the view of the World Bank, how can the Chinese economy promote economic recovery and mitigate risks through appropriate policy measures?

The following is a transcript of the conversation:

1. China's economic recovery may slow in the second half of the year, but GDP growth is expected to rise to the highest in 10 years next year.

Tencent Finance and Economics: the latest China Economic Bulletin released by the World Bank predicts that China's economic growth will slow to 1.6% this year and pick up to 7.9% in 2021. This means that we will experience the slowest economic growth in more than 40 years and then reach a 10-year high. What is the basis of this judgment?

Icas: under the influence of the COVID-19 epidemic and the quarantine measures implemented to contain the epidemic, China's GDP fell 6.8% in the first quarter compared with the same period last year, and rebounded in the second quarter, with an increase of 3.2%, which is better than the World Bank's expectations. We believe that the quarantine measures taken by China have calmed the impact of the epidemic on the economy.

We do see a significant recovery in the economy, such as real estate investment, exports and other data are picking up, but some trends may not be sustainable. In addition, areas such as domestic demand remain weak because household incomes have fallen sharply, wages have rebounded much less than in the GDP; corporate sector, and private investment is likely to remain depressed as corporate balance sheets have also been hit, with revenues and profits falling sharply in the first quarter. All these factors are likely to slow the pace of economic recovery in the second half of this year.

And I think what is more noteworthy is that the rate of recovery varies from sector to sector and industry. For example, the recovery in industrial production is faster and stronger, while the recovery in services is slower. Some industries are actually permanently affected, rather than the temporary impact of the COVID-19 epidemic-they may continue to be affected by behavioural changes and possible re-introduction of some local quarantine and blockade measures (in case there is still a possibility of another outbreak in the future), it may not be able to return to pre-epidemic levels at all.

Overall, the World Bank believes that China's economic recovery will continue in the second half of this year, but the pace of recovery will be more moderate. Looking forward to the coming year, based on the low base impact of GDP in the first quarter of this year, and the epidemic factors are expected to dissipate next year, the economy will accelerate the recovery and achieve high growth.

Symbolically, China's economic recovery may show a "hook"-initially a V-shaped, and then a slower slope.

two。 Decode the economic and social impact of the epidemic

Tencent Finance and Economics: the epidemic affects both the supply side and the demand side, but compared with the supply side, the recovery on the demand side is more difficult. COVID-19 epidemic is still sporadic recurrence, will it deal a blow to consumer confidence, delay consumer recovery, and thus affect the path of economic recovery? Is there any possibility of retaliatory consumption in China?

Ikas: that's a good question.

We can see from the data that there has been some rebound in consumption in some sectors, such as durable goods, but at the same time, consumption in other sectors, especially in the service sector, has not kept pace. This is to be expected, and people will not go more frequently after that because they have made fewer trips to the restaurant.

Most importantly, concerns about the epidemic persist, and falling incomes have a negative impact on consumption. We expect this to continue, making it difficult for the economy to recover very strongly. But we hope that by adopting the right policies, consumption will gradually return to normal by the end of this year.

Tencent Finance and Economics: the report mentions that the COVID-19 epidemic has brought new challenges to China's poverty reduction work due to labor transfer and slowing household income growth. What additional policies does China need to mitigate the impact of poverty?

Ikas: I'd like to talk about the social safety net here. The outbreak reflects some gaps in China's social security system, including limited coverage of migrant workers, who have been severely affected by the outbreak. To strengthen the social safety net on an epidemic-driven basis, there are many opportunities for China to improve the role of social security in supporting economic recovery and achieving the eradication of extreme poverty within the year. This not only helps to protect workers and families from the loss of work and income, but also alleviates the problem of underconsumption in the private sector.

In the short term, China can use its budget to expand the coverage of the social security system and increase funding adequacy for key projects such as "minimum security" and rural old-age benefits. In addition, making better use of the unemployment insurance reporting mechanism, funding active labour market training programs, and expanding loan support to encourage entrepreneurship will all help to mitigate the impact on the labour market. In the medium term, the social security deferred payment policy, which can provide incentives for companies to maintain the scale of employee employment, should withdraw from the stage.

In terms of policy countermeasures, we believe that the issuance of consumption coupons has a short-term effect on consumer spending, as do many cities and provinces in China. Consumption coupons can be aimed at hard-hit labor-intensive services, such as hotels, catering or traditional retail, can produce a larger multiplier effect, but should not be too narrowly limited to certain specific products. From a design point of view, the expiration date of consumption coupons should be set before the end of the year (or earlier) to encourage consumers to advance their consumption plans and avoid becoming quasi-savings. Providing such support to low-income families also helps to mitigate social impact and promote poverty alleviation.

Tencent Finance and Economics: the report points out that the promotion of market competition and the reform of the household registration system can help release a stronger market response. How can the reform of China's household registration system help the enterprise sector and macro-economy? What do you think of the trend of China's real estate market in the second half of 2020?

Ikas: the World Bank believes that it is very important to relax the reform of the household registration system.

China is moving towards urbanization, and the labor force should be allowed to move to places where employment opportunities exist. Deepening the reform of the household registration system and enhancing the accessibility and mobility of social services can facilitate the transfer of labor force from enterprises and industries affected by the epidemic for a long time to enterprises, industries and regions in development and expansion.

The household registration system reduces the chances of migrant workers' access to a variety of high-quality social services, including public health services, in more developed urban areas, and is a major obstacle to labor mobility and fair access to social services. We believe that cities with a population of less than 3 million should be encouraged to eliminate residence restrictions. Big cities with a population of more than 5 million are encouraged to lift suburban residency restrictions (but only for immigrants of a certain age and education level).

In addition, we hope that China will further improve its business environment to promote entrepreneurship and create conditions for new job opportunities. The World Bank's rating on China's business environment has been rising in recent years: in the past two years, China has jumped from 78th in 2018 to 31st in 2020, making it one of the top 10 economies with the fastest pace of reform for the second year in a row. However, there are still a number of areas that need to be further promoted, including strengthening the legal system, promoting competition, opening up services, and so on, so that market forces and resource allocation can play a decisive role in the economy.

These agendas were already very important to China before the outbreak, and now they will only be more important.

Tencent Finance and Economics: how to understand the impact of COVID-19 epidemic on globalization or anti-globalization? Is a new paradigm of globalization taking shape?

Ikas: the change in globalization does have an impact on the world economy, but it may actually be more resilient than we expected-the damaging impact of trade on the economy is gradually recovering.

We also have some evidence in our report that data show that trade and global value chains are recovering. Geopolitical tensions over trade and investment relations are likely to persist and there are many uncertainties that will continue to put pressure on the future prospects of countries. It would be better to ease trade and investment tensions in some way and allow the world to maintain a mutually beneficial relationship.

3. Decode the coping model of monetary, fiscal and structural policies

Tencent Finance and Economics: how should the policies of the monetary and financial sectors remain flexible to help the economy recover and mitigate some risks?

Ikas: the constraints on the supply side of the epidemic have been alleviated to a large extent, and now the policy needs to address the problem of weak demand.

Fiscal and monetary policy should play a role. According to the World Bank's assessment, fiscal policy should play a leading role, not only to stimulate the economy as a whole, but also to guide stimulus measures to address the shortcomings of the social safety net exposed by the crisis, thereby really boosting consumer confidence.

Monetary policy, on the other hand, can play a supporting role, reducing the burden on households, businesses and governments by lowering interest rates, providing liquidity and keeping moderately loose.

Tencent Finance and Economics: should China continue to maintain a loose monetary policy in the second half of 2020?

Mr. Ikas: given that the economic recovery is still fragile, I think China should keep its monetary policy loose and pay close attention to potential fiscal and financial risks.

With GDP growth expected to slow and credit growth expected to accelerate this year, the leverage ratio of the Chinese economy is likely to rise. In addition, this may cause some financial risks because of the impact of the economic slowdown on corporate balance sheets.

On the one hand, we need to ensure that the corporate and household sectors have access to cash flow, and on the other hand, we need to focus on potential financial risks.

After a rebound in economic activity, policymakers need to refocus on deleveraging and risk reduction, as they did before the crisis.

Tencent Finance and Economics: what do you think of the unlimited QE and monetization of fiscal deficits implemented by some developed countries? Is this suitable for emerging markets, such as China?

Ikas: the choice of monetary policy tools is of course different in different countries. In many developed countries, as well as some emerging market countries such as Thailand and Indonesia, we have seen central banks increasingly rely on unconventional policy tools such as QE. However, the people's Bank of China did not do so, mainly by reducing the required reserve ratio and other ways to increase liquidity.

Different policy tools have their own advantages and disadvantages. The most important point is that in the context of an economic slowdown, policy should ensure that monetary and financial conditions remain loose and that liquidity conditions support a recovery in economic activity rather than exacerbating the downturn.

Tencent Finance and Economics: the World Bank report specifically mentions the importance of deepening structural reforms for achieving sustainable economic recovery. Which departments and industries need policy support most?

Ikas: in our report, we listed a series of important priorities for structural reform, the first of which was the recession, even before the COVID-19 epidemic.

Our main recommendations in the report are, first of all, to expand opening up and international cooperation. As the world's second largest economy, China can play an important role in promoting international cooperation. This not only includes cooperation in public health affairs, but also can be extended to economic cooperation. Maintaining openness to the rest of the world and balancing the relationship between trade and investment can promote investment, accelerate the spread of knowledge and technology, and ease geo-economic tensions, the latter could further amplify the global recession caused by the epidemic.

In addition, I think measures should be taken to ensure the mobility of the labour force. We will see that in the post-epidemic era, some industries will have a permanent decline, while others may grow. Therefore, it is necessary to allow resources to be reallocated from enterprises and departments that have been damaged for a long time by the epidemic. Enter those sectors, enterprises and regions that are in the process of development and expansion. To do so, it is important to reform the household registration system, both to help reduce barriers to labour mobility and to ensure their fair access to key public services at work.

Finally, it is also very important to improve the quality of supervision. I'm not talking about reducing or removing regulatory restrictions, but to be wise, to encourage more private investment, to achieve goals, and not to overburden the corporate sector in achieving them.

Tencent Finance and Economics: if the second outbreak of the epidemic really comes, what kind of support will the World Bank provide, especially for those countries whose fiscal space is already very limited?

Ikas: the World Bank provides all kinds of assistance such as loans to borrowers. The World Bank gives different assistance to different countries, depending on their fiscal space and different needs. The World Bank will do everything we can to help borrowers, especially poor ones, which have been hit hard by the epidemic and have limited financial space.