China Quarterly Update - April 2012
April 12, 2012
- 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.
- 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.
- 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.