World Bank: China's GDP to rise to 7.9% in 2021

The World Bank projected that China's GDP growth will return to its pre-pandemic level by 2021, to accelerate to 7.9 percent next year from 2 percent in 2020, in response to improved consumer and business confidence and better labor market conditions, according to a report published on Wednesday.

Although the growth rate remained unchanged from the bank's projection in the summer, the new report suggested navigating near-term uncertainty, which will require an adaptive policy framework calibrated to the pace of the recovery both in China and the rest of the world, according to the report.

"A premature policy exit and excessive tightening could derail the recovery," it said. "Along with a flexible and supportive monetary policy, China could use its fiscal space to hedge against downside risks to growth and ensure a smooth rotation from public to private demand."

The special direct fiscal transfers to local governments, a new mechanism launched this year to ensure fiscal and bailout funds can be directly received by primary-level government departments and entities, could be extended through next year and explicitly targeted to increased social spending and/or green investment by local governments, the World Bank said.

"The global environment remains highly uncertain and this calls for an adaptive policy framework," said Martin Raiser, World Bank Country Director for China.

"The withdrawal of fiscal support should proceed gradually, but the focus should shift from traditional infrastructure to more social spending and green investment."

In terms of monetary policy, the People's Bank of China, the central bank, should return to more conventional tools while phasing out window guidance, lending targets, and relending facilities adopted to provide targeted support in the context of the COVID-19 shock, it added.

Sebastian Eckardt, World Bank lead economist for China, said that China will need to embrace the growth potential of its most developed and innovative metropolitan areas and city clusters, to rebalance the economy from investment to more innovation- and services-driven growth.

"Such a shift will need to be accompanied by fiscal policies to ensure more equitable public service delivery and increased investment in human capital for people living outside urban areas and coastal provinces," Eckardt said.