China Economic Update - June 2014
Special Topic: Changing Food Consumption Patterns in China: Implications for Domestic Supply and International Trade
- China’s economic growth is gradually slowing as the structural transformation of the economy continues.
- Output grew by 7.7 percent in 2013, matching its 2012 growth rate and exceeding the government’s 7.5 percent indicative target.
- Stable growth partly reflected the effects of mid-2013 growth support measures.
- Nevertheless, recent growth rates have been significantly below the levels observed over the past decade as drivers of economic growth continued to shift from manufacturing to services on the supply side, and from investment to consumption on the demand side, and as measures to rein in the rapid accumulation of credit came into force.
- The impact of decelerating growth on labor markets has been so far relatively small due to the structural shifts of economic activity toward labor-intensive service sectors.
- The rebalancing is not smooth, and quarterly growth is volatile.
- In part this volatility reflects tensions between structural trends and near-term demand management measures taken by the government.
- China’s growth will continue to moderate over the medium term, and the structural shifts will become more evident.
- Growth in China is expected to decrease marginally to 7.6 percent in 2014 and 7.5 percent in 2015, from 7.7 percent in 2013.
- Fiscal and financial sector reforms are needed to address financial stability risks in the medium run.
- The first task involves effectively managing the process of rapid credit growth, including less well-regulated shadow banking system.
- The second: gradual and orderly deleveraging of large stock of local government debt accumulated through off-budget and quasi-fiscal platforms.
- A sustainable resolution of these issues would require reforms in the financial sector and in fiscal policy. Both of these reforms could potentially be disruptive to growth in the short run.
- Therefore, reforms likely to support growth in the short term, such as promoting competition, eliminating entry barriers in select sectors, and reducing administrative burden on businesses, should be implemented in parallel.