China should reaccelerate reforms such as tackling the country’s shrinking labour force and weak productivity growth to maximise its economic potential following three years of coronavirus disruptions, the International Monetary Fund (IMF) said on Friday. Implementing such reforms would enable China’s income level to rise by around 2.5 per cent in five years, according to the IMF’s Article Four staff report. “Without reforms, we currently estimate growth to fall below 4 per cent over the next five years,” Diego A. Cerdeiro, a senior economist with the IMF’s Asia and Pacific Department and Sonali Jain-Chandra, the IMF mission chief for China, said in the report. The IMF on Tuesday upgraded its forecast for China’s 2023 gross domestic product (GDP) growth to 5.2 per cent – owing to the nation’s full reopening – from the previous 4.4 per cent projection made in October. Key structural reforms should be reaccelerated to lift potential growth Thomas Helbling But the country’s medium-term growth prospects are clouded by structural issues, according to the IMF report, which was written following the organisation’s annual health check of the Chinese economy and financial system in November. China’s weak productivity growth is largely a result of inefficient state-owned enterprises (SOEs) and declining business dynamism in the country, the IMF said. China must make reforms to keep SOEs competitive, especially as they are assigned with more responsibilities to grow in sectors and technologies that are strategically important and highly relevant to growing geoeconomic pressures, said the IMF. “Key structural reforms should be reaccelerated to lift potential growth which is experiencing headwinds from demographic trends and slowing productivity growth,” said Thomas Helbling, deputy director of the Asia and Pacific Department at IMF. “Pro-growth reform such as a further opening up of domestic markets and ensuring competitive neutrality between private firms and state-owned enterprises will help shore up low productivity growth at a time of shrinking labour supply.” While China’s dwindling labour force will pose a problem as the population ages and birth rate drops, the government could mitigate the impact on its economy by gradually lifting the retirement age to increase the labour supply, the report said. Despite the IMF upgrading China’s GDP projection, the economy faces major challenges in the form of a crisis in the real estate sector and potential spread of the coronavirus. “On the real estate sector, the authorities’ recent policy measures are welcome but additional action is needed to end the real estate crisis, including to increase further funding for completion of troubled projects and promote market-based restructuring. This would also help restore homebuyer confidence and contain financial stability risks,” Helbling said. Economic growth in China is consequential to the rest of the world, with a recent IMF analysis finding that an increase of one percentage point in a country’s GDP growth rate results in a 0.3 percentage point increase to other countries. “That underscores how domestic reforms could boost China’s economy and that of others too,” said Cereiro and Jain-Chandra.