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FEATURE STORY

China Quarterly Update - April 2012

April 12, 2012

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GDP growth in China will be 8.2 percent in 2012 and 8.6 percent in 2013. The World Bank's Lead Economist for China talks about China's recent economic developments, economic outlook and policy priorities.

OVERVIEW

  • The Chinese economy is in the midst of a gradual slowdown due to the combined impact of a weaker global economic environment and tighter domestic policies. 
  • The prospects for a soft landing remain high, with growth expected at 8.2 percent in 2012 and 8.6 percent in 2013.
  • The ongoing slowdown is partly welcome to the extent that it reflects a deceleration in growth from above-potential in a context where potential growth itself is gradually slowing.
  • The overriding near-term policy priority is to facilitate the gradual slowdown, while guarding against downside risks which remain elevated.
  • The longer-term policy challenge is to reinvigorate growth in the face of the projected structural slowdown and to rebalance the patterns of development. 
  • Through commitment to the structural reform agenda laid out in the 12th Five-Year Plan, China can lay the foundations for sustainable long-term development.

RECENT ECONOMIC DEVELOPMENTS

  • Slow growth in the Euro area and sluggish recovery in the US limited the contribution of next exports, as exports decelerated more rapidly than imports.
  • Tighter domestic policy conditions dampened investment – particularly in infrastructure and real estate.
  • Consumption growth remained robust as consumer confidence was sustained and household income continued to grow rapidly.
  • Inflation has been on a declining trend, with food price inflation receding as one-off factor faded and nonfood price inflation easing as global and domestic conditions weakened.
  • The balance of payments softened, with the trade balance falling into deficit early 2012 as manufacturing exports slowed while commodity prices remained high.

ECONOMIC OUTLOOK

  • Cyclical weakness is expected to dominate the near-term outlook, with growth projected at 8.2 percent in 2012 and 8.6 percent in 2013.
  • Domestic demand would contribute 8.4 percentage points to growth in 2012 as consumption slows slightly and investment decelerates rather sharply.
  • As world trade is anticipated to remain weak, external demand would subtract some 0.3 percentage points from growth in 2012.
  • Significant price adjustment – both absolute and relative – is in the pipeline for 2012, with inflation expected to trend downwards to 3.2 percent, the external terms of trade likely to improve and the pace of currency appreciation anticipated to slow. 
  • China’s current account surplus is projected to increase slightly to 3 percent in 2012 and 3.3 percent in 2013, with foreign reserve accumulation expected to moderate.
  • While our central projection remains for a gradual slowdown, downside risks remain elevated and center on the strength of the recovery in high-income countries and the ongoing adjustment in domestic property markets.
  • The longer-term outlook will depend on how China manages key structural challenges.
  • As the traditional growth drivers gradually fade, , China is expected to see slower growth.
  • In addition, the welcome efforts to rebalance the economy should also alter the pattern of growth and improve its quality.
  • These trends would play out gradually over time, with illustrative scenarios showing growth decelerating from recent rates of 10 percent to about 5 percent in around 20 years time.

POLICY PRIORITIES

  • The overriding policy challenge for the near term is to facilitate a soft landing. 
  • While the prospects for such an outcome remain high, there is concern is that growth slows too quickly.
  • However, sufficient policy space should exist to respond to downside risks. 
  • The burden of any countercyclical response should primarily fall on fiscal policy, with adjustments welcome as well to the stance of monetary policy. 
  • The policy response would need to be carefully crafted, keeping in mind longer-term effects and objectives.
  • Fiscal measures to support consumption would attract first priority (such as targeted tax cuts, social welfare spending and other social expenditures).
  • Reserve requirements could be tweaked further to ease the availability of credit, with policy rate action best reserved for downside scenarios given already accommodative rates.
  • Ongoing administrative efforts have been helpful in cooling the property markets, but would preferably be substituted eventually by market-based measures that raise the cost of capital and expand the range of investment opportunities.
  • The policy challenge for the longer term is to continue steering the Chinese economy towards a more sustainable growth path. 
  • Given the anticipated structural slowdown, this would involve reinvigorating the underlying fundamentals for growth to secure healthy per capita income growth.
  • Addressing the imbalances would involve sustaining the ongoing shift of focus from the rate of growth to the quality of development.
  • New efforts can help China sustain its competitive advantage by progressively shifting from low cost to higher value supported by innovation.
  • New approaches can also help sustain poverty alleviation as the rate of poverty reduction becomes steadily less sensitive to economic growth.
  • Similarly, new strategies can help ‘green’ growth and protect the environment. 
  • With the 12th Five Year Plan laying out a comprehensive agenda of structural reform, what will matter most now is the commitment to reform and implementation.