China Quarterly Update - April 2011
April 27, 2011
- China’s economic growth has remained resilient as the macro stance moved towards normalization.
- The economic outlook remains broadly favorable.
- A fully normalized macro policy stance is key to address the macro risks with respect to inflation and the housing market.
- While the macro and financial risks on the property market require macroeconomic measures and reforms, social concerns require a different policy response.
- The 12th Five-Year Plan (5YP) can provide direction for reform.
RECENT ECONOMIC DEVELOPMENTS
- Economic growth remained resilient as the macro stance moved towards normalization.
- Domestic demand held up well in early 2011, supported by investment, even as consumption slowed.
- Exports slowed down in late 2010 but continued to expand in early 2011.
- Reflecting the still robust overall domestic demand, imports held up well early this year, especially those of manufactured goods.
- Falling external terms of trade combined with the volume developments to lower the trade surplus.
- Inflation has risen to a 32 month high on higher food and other raw commodity prices.
- The government has taken several steps to contain inflation.
- Foreign reserves continue rising rapidly.
Some medium term trends
- With strong real growth and substantial real appreciation, China’s share in the world economy has surged in recent years.
- During this time, China’s exports rose rapidly.
- Nonetheless, because of strong domestic demand and relative price changes, the relative importance of external trade has declined.
- The global growth outlook remains broadly favorable despite recent shocks.
- International raw commodity prices more generally have risen.
- Risks to the global growth outlook remain.
- Domestically, growth is likely to ease somewhat this year and next to a still healthy rate.
- Investment growth is likely to slow down somewhat.
- Consumption should remain supported by a robust labor market, but inflation creates headwind.
- Net trade should be broadly neutral with respect to growth.
- In all, we project real GDP growth to slow to 9.3 percent in 2011 and 8.7% in 2012.
- Inflation is unlikely to escalate but there are risks.
- Domestic risks add to the global ones noted above.
- The property market is a particular source of risk.
- Looking further ahead, whether the recent trend towards a lower external surplus and lower dependence on external trade will be sustained remains to be seen.
- The macro stance needs to be normalized fully to address macro risks including on inflation and the property market.
- Recent economic policy has largely been moving in this direction.
- Looking ahead, it is too early to stop the macro tightening, while, with risks both ways, fiscal and monetary flexibility is key.
- On the property market, market-related risks require one set of policies and social concerns another.
- On the other hand, making housing more affordable for targeted groups requires sustainable rules-based arrangements, almost unavoidably explicitly subsidized by the government.
- What will be the focus of structural reforms?
Fiscal policy and public finance
- The overall fiscal stance in 2010 probably withdrew stimulus.
- Among budgetary expenditures, priority areas saw significant increases in 2010.
- The 2011 budget is cautious.
- The government has indicated some plans for public finance reforms to support the transformation of the pattern of growth.
- Scaling up social housing is rightly used to help transform the economic growth pattern and improve people’s livelihood.
- Successful, sustainable social housing requires strong institutions and clear rules, including on a sustainable financing model and the funding of the subsidy element.
Monetary, finanicial, and exchange rate policy
- Monetary conditions have tightened recently as monetary policy moved towards normalization.
- Recent changes in the operation of monetary policy and a new concept do not imply a change in approach.
- Over time, a larger role for interest rates could make the conduct of monetary policy more effective and less distortive.
- The 12th 5YP (2011-15) was launched earlier this year.
- Industrial upgrading and moving up the value chain in manufacturing.
- Policy-wise, it is important to find the right balance between these 2 areas of emphasis.
- With regard to the 5YP’s growth targets, the challenge is to make them binding and consistent nationwide.
- The targeted 4 pp of GDP increase in the share of services is ambitious but supported by policy proposals.
- The targeting of wage growth at or above GDP growth is new.
- Reforms of inter-governmental fiscal relations will be crucial for achieving meaningful progress on a range of other policy priorities.
- Barriers to labor mobility may require more attention.