China may not move away from its stringent Covid Zero policy until the second half of next year, according to the International Monetary Fund’s top official in the country, who also called for more monetary and fiscal stimulus to support the economy.
The IMF assumes conditions for lifting the zero-tolerance approach to combating Covid infections will be in place by the latter half of next year, Steven Barnett, the IMF’s senior resident representative in China, said in an interview on Friday with Bloomberg TV’s Shery Ahn and Haidi Lun.
The Covid Zero strategy — which entails mass testing the population, quarantine for those infected and their close contacts, and city-wide lockdowns — has been disruptive for the economy, with growth likely to slow to just 3.2% this year, according to IMF estimates.
Barnett said the Covid policy worked well for China in 2020 and 2021 but has taken a heavy toll on the economy this year because of the highly transmissible nature of the omicron variant, which has led to lockdowns of major cities like Shanghai.
The IMF official said Beijing still has room to provide more stimulus for the economy after the central bank already cut interest rates and the government beefed up infrastructure investment. He said Chinese policymakers should focus their measures more on supporting consumption than investment, which he argued would boost domestic demand in a more efficient way.
While there’s space for China’s monetary policy to “stay accommodated” given low inflation in the country, fiscal policy is the “key,” Barnett said.
“I would highlight that it’s not just the size of the deficit and how much they increase spending, but really the composition of spending,” he said. “There’s really potential to rotate the composition of fiscal policy to shift away from supporting investment and more towards supporting consumption. That actually would provide a bigger boost to demand.”
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