Research

Abstract

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 impact of the international financial distre... Show More

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 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