China Quarterly Update - April 2011

April 28, 2011


China’s economic outlook remains broadly favorable with real GDP growth projected at 9.3 percent in 2011 and 8.7 percent in 2012, but risks on inflation and the property market call for full normalization of the macroeconomic stance to keep growth on track.


  • 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.


  • 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.
    • Rebalancing.
    • 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.