China's policy stimulus may worsen economic distortions - OECD

In its latest survey on the Chinese economy published on Tuesday, the Organization for Economic Co-operation and Development (OECD) highlighted the concerns over the Chinese stimulus measures to prop up the economic growth.

Key Findings:

“Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term,” 

“The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging,”

China’s corporate debt has fallen to about 160 percent of gross domestic product (GDP) due to a multi-year clampdown on riskier types of financing and debt, but the level was still higher than in other major economies, 

China’s fiscal stimulus could be as high as 4.25 percent of GDP this year, up from 2.94 percent in 2018, “

Ludger Schuknecht, Deputy Secretary-General of the OECD, noted that the easier monetary policy should help reduce the risk of liquidity strains which could put further pressure on businesses.

But he said Beijing should prevent any policy “overshooting”.

Fiscal policy should aim to support the economy while avoiding any side-effects,

“I’m sure government authorities and the PBOC are monitoring this carefully. It’s a matter of implementing it (stimulus) in the right way.” 

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