OECD: Chineese policy stimulus may worsen economic distortions

 OECD: Chineese policy stimulus may worsen economic distortions

China’s stimulus measures will shore up economic growth this year and next but may undermine the country’s drive to control debt and worsen structural distortions over the medium term, the OECD said in a report.

Beijing has stepped up fiscal stimulus to prevent a sharper slowdown in the world’s second-largest economy, which is being squeezed by weaker domestic demand and a trade war with the United States.

“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 OECD said in its latest survey on China’s economy.

“The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging,” Reuters cited the report as saying.

China’s corporate debt has fallen to about 160% of 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, the OECD said.

China’s fiscal stimulus could be as high as 4.25% of GDP this year, up from 2.94% in 2018, the OECD added.

China’s economic growth is likely to slow to 6.2% this year - the weakest pace in nearly 30 years, and growth is expected to cool further to 6% in 2020, the OECD said. The economy expanded 6.6% in 2018.

Growth of China’s exports of goods and services could slow to 4.5% this year from 5.1% in 2018, amid trade frictions with the United States, the OECD predicted.

China’s current account may swing to a deficit of 0.1% of GDP this year from a small surplus in 2018, amid its rebalancing towards domestic demand, the OECD added.