“A gradual tightening in monetary policy and the use of administrative tools moderated investment growth in the second half of 2006,” says ADB Chief Economist Ifzal Ali. “In 2007 and 2008, softer external demand and policy curbs are expected to pull growth down gradually.”
The report says the Government is likely to restrict investment growth and cool the economy in the short run. In the medium to long-term, the aim is to achieve a more balanced and inclusive economy, less dependent on exports, investment and industry, and more on private consumption and services.
Responding to various restrictions, especially those targeted at energy use and pollution, and others curbing property speculation, investment growth is projected to moderate to 20% in 2007 from 24% in 2006.
Industrial growth is projected to slow to 11% in 2007 and to 10.8% in 2008 because of significant oversupply in some sectors; slower growth in investment as a result of the tightening measures; and easing export growth caused by softer external markets.
Agriculture is expected to benefit from a new official emphasis on rural development under the country’s 11th Five-Year Program (2006-2010). Agricultural production is projected to increase by 5.2% to 5.4% in the next 2 years, accelerating from an average of about 4% growth over the past half decade.
Services are expected to grow by 10.4%-10.5% in the next 2 years, against a 10.3% growth in 2006, supported by government efforts to promote consumption as well as expenditures associated with hosting of the Olympics in 2008.
The softening in export markets and a reduction in PRC tax rebates for exports are expected to shrink the growth of merchandise exports to 18% in 2007, from 26% last year. Import growth will ease to about 18% against 22% in 2006 as investment decelerates.
Inflation will pick up, though, to about 1.8% in 2007 and 2.2% in 2008 because of expected rises in labor costs and higher prices of water, electricity and fuel.
Policy challenges for PRC include the need to rebalance the economy by reducing reliance on exports and investment for growth, in favor of private consumption and a shift from industry-led growth to more services-led growth. But limited progress has been made so far on rebalancing, in part because monetary policy and other economic stabilization policies do not have the same impact in the PRC as in a full market economy.
Another policy challenge for PRC is the increasing income inequality that impedes the growth of private consumption and adds to social tensions. Unemployment and underemployment have become serious concerns for policy makers.
