The World Bank has sharply slashed its annual growth forecast for China, warning in a report on Wednesday that Covid disruptions could further slow recovery in the world’s second-largest economy.

China is the last major economy wedded to a zero-Covid policy, using rapid lockdowns, mass testing and strict movement restrictions to eliminate outbreaks -- but it has tangled supply chains and dragged economic indicators to their lowest levels in around two years.

Growth in China is projected to slow to 4.3 per cent in 2022, the World Bank said in a report on Wednesday, marking a steep 0.8 percentage-point drop from the December forecast.

This “largely reflects the economic damage caused by Omicron outbreaks and the prolonged lockdowns in parts of China from March to May,” the report said, referring to the highly transmissible variant of the coronavirus.

In those months, restrictions on dozens of cities including the manufacturing hubs of Shenzhen and Shanghai as well as the breadbasket province of Jilin battered business operations and kept consumers at home.

“In the short term, China faces the dual challenge of balancing Covid-19 mitigation with supporting economic growth,” said Martin Raiser, the World Bank country director for China, Mongolia and Korea.

“The dilemma... is how to make the policy stimulus effective, as long as mobility restrictions persist.” Activity is expected to rebound in the latter half of 2022, helped by fiscal stimulus and more easing of housing rules, the World Bank said.

But domestic demand will likely recover gradually and only partly offset the earlier pandemic-related damage, it added.

The World Bank’s forecast adjustment came as concerns grow that China may not meet its official growth target of around 5.5 per cent this year.

Premier Li Keqiang has warned that the challenges today are in some ways “greater than when the pandemic hit” in 2020, and the government has rolled out a series of measures to try and jump-start the economy.

The Chinese government has also launched a major infrastructure push this year, but the World Bank warned this was a precarious path.

“There is a danger that China remains tied to the old playbook of boosting growth through debt-financed infrastructure and real estate investment,” it said Wednesday.

“Such a growth model is ultimately unsustainable and the indebtedness of many corporates and local governments is already too high.” The latest forecast also assumed that China’s zero-Covid policy will be “maintained in the short term to avoid stressing its health care system”, meaning the possibility of recurrent disruptions.

The World Bank has also cut its global growth forecast to 2.9 per cent, warning that the world economy risks falling into a harmful period of 1970s-style “stagflation” in the wake of the Russian invasion of Ukraine.

China’s yuan eases: China’s yuan eased against the dollar on Wednesday, pressured by market worries over increasingly divergent monetary policy stances between China and other major economies. The European Central Bank is scheduled to meet on Thursday and markets expect it to confirm an end to bond buying this month. Its US counterpart is widely expected to raise its benchmark funds rate by 50 basis points next week and again in July. Meanwhile, in China, investors believe a mid-year liquidity injection is still needed to underpin the country’s slowing economy. “The package of monetary and financial policies in 2022 focused on providing relief to market entities.... Apart from blanket cuts to the reserve requirement ratio (RRR) and interest rates, structural monetary policies (were) also featured prominently,” analysts at CICC said in a note. Before the market opening, the People’s Bank of China (PBOC) set the yuan’s midpoint rate at 6.6634 per dollar, 15 pips firmer than the previous fix, 6.6649. In the spot market, onshore yuan opened at 6.6670 per dollar and was changing hands at 6.6740 at midday, 28 pips weaker than the previous late session close.