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China Quarterly Update, December 2008
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 | | The impact of the international financial and economic turmoil on China’s economy has been manageable so far, but is expected to intensify.
Domestic factors have already made China’s economy slow down in 2008, coming off its high pace in 2007.
Against this background, the authorities have adopted a more expansionary macro economic stance, and higher government-influenced spending is going to play a key role in 2009.
The stimulus policies provide China with a good opportunity to rebalance its economy in line with the objectives of the 11th five-year plan.
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| | | | RECENT ECONOMIC DEVELOPMENTS |
| China’s economy has slowed down considerably in the first 10 months of 2008.
Over the past year, the impact of the international financial turmoil on China’s economy has been manageable.
Overall export developments mask significant differences between sectors.
The economic impact in China of the international turmoil is set to intensify.
China’s overall growth in 2008 has been affected by slower domestic investment growth, partly in response to tighter policies.
The real estate sector—a key target of the policy tightening—has seen a particularly pronounced slowdown.
Weakness in real estate construction has contributed to a sharp slowdown in several “upstream” industries.
The impact of continued real estate weakness on the financial sector and households’ balance sheets is likely to be modest.
Even so, because weakness in the real estate sector affects local government revenues and economic growth, the government has taken some supportive measures.
Most other segments of the domestic economy, notably consumption, seem to have held up reasonably well so far.
With the trade surplus soaring again, foreign exchange accumulation continues.
Inflationary pressure has receded.
The effective exchange rate has strengthened considerably.
Despite capital controls, China’s equity markets have been affected substantially by the global slowdown.
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| | | | ECONOMIC PROSPECTS AND POLICIES |
| Prospects Global growth prospects are distinctly unfavorable.
The experience in earlier global downturns suggests very weak export growth in 2009, even though China’s exports are likely to outgrow world imports significantly.
China’s overall economic growth is sensitive to export developments.
Private sector investment is likely to be subdued.
Government-influenced investment and government consumption will be boosted by the fiscal stimulus announced on November 9.
Private consumption growth is likely to soften in 2009, but will receive some support from lower inflation and policy.
In a scenario based on these considerations, which include significant policy stimulus, GDP growth would be around 7.5 percent in 2009.
The risks to this scenario are broadly evenly balanced.
One bright spot for China is the impact of lower raw material prices on inflation and margins.
We think consumer price inflation will recede further.
Despite export volume weakness, China’s current account surplus is likely to increase further in 2009 due to the lower raw commodity prices.
back to top Macroeconomic Policies—fiscal policy has moved center stage The macro policy stance has shifted rapidly recently, and has rightly become expansionary.
There are several reasons why economic policy should not to try to offset completely the impact of the external shock and housing weakness on growth.
Flexibility and transparency in the implementation of expansionary policies is very important.
The authorities will need to strike a balance between two considerations that will guide economic policy making for 2009. First, there is the imperative for maximum impact on domestic demand, growth and employment. Second, policies need to support the medium-term rebalancing and long term development and growth agenda.
It would be ideal if the policy stimulus in 2009 can be shaped by the rebalancing and long term development agenda.
Since the summer of 2008, the authorities have taken several steps to support growth.
On November 9, the government announced the outlines of a large package to stimulate growth and employment.
As underscored by the November 9 package, fiscal policy is set to play an important role in supporting growth.
With the November 9 plan, the government identified measures in 10 areas to boost domestic demand and growth in 2009 and 2010. Public housing projects Rural infrastructure investment Transport infrastructure Health and education The environment Innovation and restructuring Post-earthquake reconstruction Household income Rolling out the VAT reform nationwide in 2009 Increasing bank lending
The package has secured and in many cases speeded up the execution of investment projects.
Fiscal policy in 2009 is likely to lead to a sizable but manageable increase in the government deficit.
back to top Monetary and exchange rate policy The authorities have started to ease monetary policy.
It is difficult to say at the moment how credit growth will develop.
The calls for more bank financing in specific areas, such as rural investment and to SMEs may create challenges.
Lingering concerns about inflation among some of China’s authorities strengthen the case for more exchange rate flexibility and monetary independence.
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