China growth to remain high despite challenges
Updated: 2010-12-31 07:45
By Liao Qun(HK Edition)
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The external economic environment that China is facing in 2011 is going to remain challenging and complex.
Given the US Federal Reserve's second round of quantitative easing (QE2), economic recovery in the US is expected to sustain, but the pace of recovery will remain slow and an eventual relapse seems inevitable.
In Europe, the recovery is seen to be more fragile, as the debt crisis still lingers and growth momentum remains weak. Yet, a certain degree of advancement in European economies can be expected.
The growth prospects of emerging market economies are more encouraging, especially in Asia. Overall, the global economy is expected to continue to recover and expand by around 4 percent in 2011, extending the overall trend albeit at a slower pace compared with 2010. While the QE2 strategy poses a severe inflation threat to many countries, it will nevertheless help sustain the US and global economic recovery.
In terms of domestic economic policy - given the recent escalation of inflation while growth momentum stabilizes - the Central Government has shifted its monetary policy stance from "appropriately loose" to "stable", while retaining its "proactive" fiscal policy. The "stable" mode in monetary policy is probably better interpreted as "appropriately tight", as the government had already launched a tightening cycle in mid-October 2010 with two interest rate hikes and three rises seen in the minimum reserve requirement ratios for banks. Monetary tightening is set to continue or even strengthen in 2011, with three to four new hikes in interest rates and four to five further rises in the reserve requirement ratio anticipated.
Given the vanishing of base effects, expectations for faster yuan appreciation and the continued weakness of developed economies, China's export growth is poised to slow down substantially in 2011. Though emerging economies will remain strong and this will support China's shipments to them, it will not be sufficient to reverse the slowing trend as developed economies absorb most of China's exports. Exports are forecast to grow 17 percent in 2011, only about half the rate of 2010.
Investment growth is also expected to moderate in 2011. For the "12th Five-Year National Economic and Social Development Program", curbing the excess expansion of fixed asset investment (FAI) has been the major objective of the government's macroeconomic tightening, and is also one of the priorities for readjusting the macroeconomic structure. Thus, growth in FAI is poised for a continued slowdown in 2011. On the other hand, development remains a priority for policy makers, and China is still facing historical undertakings in large-scale infrastructure construction, industrial upgrading, technological innovations, and development of emerging industries, etc, all of which will call for maintaining the high growth of FAI. Growth in FAI is therefore expected to be around 20 percent in 2011, 5 percentage points lower than in 2010.
Consumption growth is also poised to continue strengthening. The Central Government has the strong intention of achieving noticeable progress in accelerating consumer spending in the first year of the 12th Five-Year Program. This is being taken in a bid to gradually turn around the pattern of slower growth in consumption compared with that which has been seen in exports and FAI in the past few years. To this end, household income growth is expected to ramp up in 2011. Meanwhile, various measures to promote consumer spending that have been introduced in recent years as well as a variety of subsidy programs, are anticipated to continue or be reinforced with variants. Retail sales are thus predicted to increase by 19.5 percent in 2011, 1.1 percentage points higher than in 2010.
Against this backdrop, China's GDP is forecast to grow by 9.4 percent in 2011, 0.7 percentage points lower than in 2010.
From a macroeconomic standpoint, consumption expenditure, capital formation and net exports of goods and services will account for 49 percent, 47.2 percent and 3.8 percent of GDP in 2011 respectively, up 1 percentage point, down 0.4 percentage points and down 0.6 percentage points, respectively, from 2010, making a step towards improved growth balance.
US Financial Secretary Timothy Geithner proposed at the recent G20 summit that the current account surplus or deficit of each country should be limited to within +4 percent and -4 percent of GDP. China will be in a position to meet this requirement in the short run, and ongoing US criticism of China's trade surplus and pace of yuan appreciation is thus not justified.
The author is senior vice president, chief economist/strategist for China banking at CITIC Bank International Ltd. The opinions expressed here are entirely his own.
(HK Edition 12/31/2010 page3)