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China’s economy has not recovered 100% from Covid, says former central bank advisor

China’s policymakers are “overly aggressive” in containing debt levels, a leading Chinese economist told CNBC, while acknowledging that the economy has not completely recovered from the pandemic.

China, where the coronavirus was first detected, was the only major economy that grew last year. The country reported a 2.3% growth in 2020 from a year ago, driven mostly by exports while recovery in consumption lagged.

“Overall, I would say the economy, the Chinese economy is not 100% back to normalcy. I would say 90% back to normalcy,” Li Daokui, an economics professor at Tsinghua University, told Martin Soong during the virtual CNBC Evolve Global Summit on Wednesday.

Chinese flag waving in front of Shanghai cityscape.

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Li, a former advisor to China’s central bank, said policymakers should allow the economy more time to recover before cracking down on debt. He said consumer spending has not returned to pre-pandemic levels and some businesses in the services sector are still struggling.

There have been signs that China has started to rein in debt.

It comes as debt continued to rise in the Chinese economy over the past year as authorities tried to make it easier for businesses to get loans to tide through the challenges caused by Covid-19.

Chinese authorities had tried to curb further growth in borrowing even before the pandemic, fearing that elevated debt levels would threaten the health of the world’s second largest economy.

Li also warned that the relative strength of the U.S. economy increases the risk of capital flight from China and other parts of the world. Capital flight occurs when money or assets leave one country when another offers better investment returns or opportunities.

“Not only foreign money formally invested in Chinese economy will look … for alternative in going back to the U.S., but also a lot of Chinese domestic money will be lured away from the Chinese economy.

Li Daokui

economics professor, Tsinghua University

The professor explained that an economic recovery in the U.S. raises the possibility of the Federal Reserve normalizing monetary policy. That will attract funds from other countries into the U.S., he added.

“Not only foreign money formally invested in Chinese economy will look … for alternative in going back to the U.S., but also a lot of Chinese domestic money will be lured away from the Chinese economy,” said Li.

“It is a risk overall for the whole world,” he said, adding that the threat is bigger for economies such as India and Brazil which are “still suffering from the coronavirus.”

Some economists expect the U.S. central bank to start slowing down its asset purchase program as early as the end of this year. But they say an interest rate hike may not happen until 2023.

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