China

The Chinese economy is in the midst of a gradual slowdown. A weaker global economic environment and tighter domestic policies combined to slow gross domestic product (GDP) growth from 10.4 percent in 2010... Show More + to 9.2 percent in 2011. Slow growth in the Euro area and sluggish recovery in the US limited the contribution of net exports, as exports decelerated more rapidly than imports. Tighter domestic policy conditions dampened investment particularly in infrastructure and real estate. In contrast, consumption growth remained robust as consumer confidence was sustained and household income continued to grow rapidly. The current account surplus is projected to increase slightly to 3 percent of GDP in 2012 and 3.3 percent in 2013. Terms of trade improvements offset an initially lower trade balance driven by export weakness and import robustness. With trade volumes recovering in 2013 and the terms of trade improving further, the surplus will also expand in 2013. Despite continued net capital inflows, foreign exchange reserves will accumulate more slowly. The longer-term outlook will depend on how China manages key structural challenges. As the traditional engines of growth weaken, GDP growth should gradually slow. The growth benefits of urbanization and industrialization are expected to hit diminishing returns. China will also see major demographic change over time, with old-age dependency rising and the labor force shrinking soon. Total factor productivity growth would likely soften as efficiency gains from first-generation reforms lessen and technology gaps with high-income economies narrow. In addition, the welcome efforts to rebalance the economy are expected to not only alter the pattern of growth, but also bring slower, though higher-quality, headline growth. Show Less -

China's growth has moderated somewhat, with a shifting composition. Gross Domestic Product (GDP) growth declined from 10.6 percent in the first half to a still surprisingly strong 9.6 percent (yoy) in... Show More + the third quarter. The domestic economy cooled as the stimulus impact is fading out and the monetary stance is being normalized. Investment and urban consumption have decelerated, and so have imports. Meanwhile, with exports strong, net external trade has contributed significantly to (yoy) growth and the external surplus is rising again. The Results Based Management (RMB) has appreciated somewhat against the US dollar recently, although not in effective terms. Despite an expected deceleration, global growth prospects are fairly favorable due to emerging market strength. But risks include a weaker outlook in high income countries and ample international liquidity as well as the global imbalances and possibly contentious policies triggered by them. Global price pressures remain contained by spare capacity in many countries. But there are upward inflation risks internationally. Show Less -

In spite of the global recession, China's economy grew 8.7 percent in 2009. Massive investment-led stimulus was key, but real estate investment gained prominence more recently and household consumption... Show More + growth has held up very well. The domestic growth momentum continued in the first months of 2010. Exports declined in 2009 as a whole, even as China gained global market share. With imports strong, external trade was a major drag on growth in 2009 and the external current account surplus declined sharply. Exports rebounded strongly through 2009, though, and exceeded the pre-crisis level in early 2010. In a heated real estate market, surging property prices triggered policy measures to expand supply and curb speculation. In spite of the global recession, China's economy grew 8.7 percent in 2009. Growth decelerated significantly in end 2008 and early 2009 as exports collapsed amidst the global recession. But, China's massive stimulus package kicked in the second quarter of 2009. We estimate that quarter on quarter gross domestic product (GDP) growth peaked in the second quarter and moderated to an average 10 percent in the second half (seasonally adjusted annualized (SAAR)), bringing year on year (yoy) GDP growth to 10.7 percent in the fourth quarter. The domestic growth momentum broadly continued in the first months of 2010. Growth of monetary aggregates and investment growth started to ease somewhat in late 2009. After a rush of lending in the first weeks of 2010, the government took measures to contain the pace of lending and loan growth slowed to 27.2 percent (yoy) in February. However, consumption did not slow in early 2010. Retail sales grew 15 percent in the first 2 months of 2010, in real terms, compared to a year ago. Show Less -

China's economy has continued to feel the brunt of the global crisis. Global economic activity continued to decline in the first part of 2009, even as tentative signs of stabilization have emerged recently... Show More + in several countries. However, very expansionary fiscal and monetary policies have kept the economy growing respectably. Fiscal stimulus is centered on the infrastructure-oriented 'RMB 4 trillion' stimulus plan and the monetary stimulus has led to a surge in new bank lending. Government-influenced investment has soared. Market-based investment has lagged, although positive signs have emerged in the real estate sector. Consumption has held up well. Very weak exports have continued to be the main drag on growth, but import volumes have recovered in the second quarter of 2009 as raw material imports rebounded. One reason is that the fiscal deficit is likely to be significantly higher than budgeted and additional stimulus now reduces the room for stimulus in 2010. Nonetheless, with subdued global demand and less export growth, China needs more growth from domestic demand, consumption in particular. Also, relative prices need to change, notably those of natural resources. The transition to more consumption-led, service sector-oriented, and labor-intensive growth requires policy adjustments that: (i) help channel resources to sectors that will grow in the new setting, instead of to sectors that have traditionally done well; and (ii) support thriving domestic markets and successful, permanent urbanization. Such reforms can be pursued more successfully if flanked by a well-functioning public finance system and social safety net. Show Less -

Large fiscal and monetary stimulus has supported a recovery in China's economy. Falling exports amidst the global recession have been a major drag on growth. Nonetheless, real gross domestic product (GDP)... Show More + growth rose to 8.9 percent year-on-year in the third quarter on the back of the stimulus. Although most of the stimulus has shown up in infrastructure oriented government-led investment, some has been consumption-oriented and domestic demand growth has been broad based. Resurgent housing sales have started to feed through to construction activity. Investment in manufacturing is affected by spare capacity, but consumption has held up well. The strong domestic demand has buoyed import volumes and the current account surplus may fall to 5.5 percent of GDP this year even with import prices down sharply. The downturn has clearly affected the labor market, but the impact has been smaller than expected and the trough may have been past. In the medium term, the recovery can only be sustained by successful rebalancing of the economy. Rebalancing and getting more growth out of the domestic economy call for more emphasis on consumption and services and less on investment and industry. On earlier initiatives, some further steps have been taken in recent months to rebalance and boost domestic demand, including increasing the presence of the government in health, education, and social safety; improving access to finance and SME development; and mitigating resource use and environmental damage. These are useful steps, but more policy measures will be needed to rebalance growth in China, given the strong underlying momentum of the traditional pattern. Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome. Show Less -

This paper commences with an overview that provides the following observations: economic growth remains rapid and the trade surplus continues to widen, while the pattern of growth remains unchanged; the... Show More + recent financial market turmoil may affect China's economy, but China is well placed to absorb the impact; China's macroeconomic prospects remain good; the external imbalance remains the main macroeconomic issue; and a key challenge remains to rebalance the economy. The paper goes on to list: recent economic developments, economic prospects and policies, financial sector policies; and special focus - is china reaching the end of its labor surplus phase. Show Less -

This paper commences with an overview that provides the following observations: although growth again surprised on the upside, the pattern of growth and the implications for policy have remained largely... Show More + unchanged; prospects for growth this year are good, both globally and in China; with no obvious need to tighten overall demand, policy would best focus on the financial sector and rebalancing the economy; The rapid rise in the stock market index has drawn the attention of policymakers; and China's key economic challenge is to rebalance the economy. The paper goes on to list: recent economic developments, economic prospects and policies, financial sector policies and developments and corporate sector policies and developments. Show Less -

The note particularly discusses economic growth in China, which has been higher than expected, in part due to more rapid domestic demand growth. Reversing the pattern of the first half of 2005, domestic... Show More + demand appears to have rebounded in the third quarter-reflecting both stronger investment and stronger consumption-while the contribution of net external trade declined. Recent developments point to a very slight moderation of growth in the coming year. Under current circumstances therefore, more rapid growth in credit and investment would be unwelcome. Changing the pattern of growth is high on the agenda. The 5th plenary session of the 16th Central Committee of the CPC held in October discussed changing China's pattern of growth, moving to growth that is less resource-intensive, to more "knowledge-driven" (that is, through higher efficiency), and more equally-shared opportunities. Show Less -

The impact of the international financial and economic turmoil on China's economy has been manageable so far, but is expected to intensify. China's financial system is relatively insulated from the direct... Show More + impact of the international financial distress. In the real economy, overall export growth has until recently remained robust due to strong demand from emerging markets and gains in global market share reflecting strong competitiveness, although with pronounced differences in export performance between sectors. However, looking forward, the impact of the crisis is spreading globally, with risk aversion and deleveraging leading to a funding squeeze that affects demand in many countries, including many emerging markets. Thus, as in earlier global downturns, China's export growth is likely to be low in 2009, even with expected continued market share gains. Domestic factors have already made China's economy slow down in 2008, coming off its high pace in 2007. Due in part to an earlier tightening in macroeconomic policies, investment growth declined in 2008, led by real estate and construction, which then fed through to several 'upstream' industries. Most other segments of the domestic economy, notably consumption, seem to have held up reasonably well so far. Looking ahead, private sector investment is likely to be weighed down by the unfavorable external prospects and continued weakness in real estate. Private consumption growth is likely to soften in 2009, but will receive some support from fiscal policy. In the mean time, inflation is coming down steadily. After absorbing higher food prices, headline inflation has receded and, with sharply lower raw commodity prices, inflation is not an issue of concern at this point. Show Less -

China's key economic challenge is to rebalance the economy. The concerns about high investment and the pattern of growth have to be addressed by structural reforms. The underlying causes of high investment... Show More + can be tackled through better pricing of energy, resources, land, and environmental damage; higher interest rates; limiting retained earnings by a State Owned Enterprise (SOE) dividend policy; and moderating local government incentives to pursue growth. Rebalancing the economy means a shift in production from industry towards services, more reliance on domestic demand, more equally shared growth and more environmentally sustainable growth. Besides being desirable in their own right, measures that support rebalancing are also likely to address the surging trade surplus, China's main short term macro challenge. Show Less -