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Weak Global Demand Clouds PRC Growth Outlook
added: 2011-09-18

The Asian Development Bank (ADB) sees strong investment and consumption driving 2011 gross domestic product (GDP) growth in the People’s Republic of China (PRC). But weakness in advanced countries and the government’s efforts to cool inflation are slowing the expansion.

In an update of its flagship annual economic publication, Asian Development Outlook 2011 (ADO 2011), released today, ADB trimmed its 2011 growth estimate to 9.3% from 9.6% projected in April. In 2012, the growth forecast is lowered slightly to 9.1%.

“Downside risks to the growth outlook relate mainly to uncertainty over external demand, in particular from the European Union, the country’s largest trading partner,” said ADB Chief Economist Changyong Rhee.

The 2011 estimate for inflation has been revised up to 5.3% from 4.6% in April, largely as a result of a sharp spike in food prices. Those pressures are expected to ease in the second half and inflation is expected to pull back to 4.2% in 2012 on softer global commodity prices, along with further appreciation of the yuan. Nevertheless inflation remains a concern, with the average rate expected to remain above the official target of 4.0% despite numerous policy actions to rein in liquidity, including three hikes in the benchmark lending interest rate and six increases in the reserve requirement for banks in the first seven months of 2011.

The tighter monetary conditions and weak demand from Europe and the United States saw growth moderate in the first six months of 2011 with the ongoing wind back of stimulus measures after the global economic crisis slowing public investment in infrastructure. At the same time, fixed asset investment expanded by over 25%, while foreign direct investment inflows rose to more than $60 billion in the same period. Private consumption was also robust, underpinned by a rise in real incomes of nearly 14% in rural areas and 7.6% in cities.

The government raised the monthly income tax threshold from 1 September 2011, which will sharply reduce the number of wage earners that pay tax. This is expected to give private consumption a further boost, although it will cut government revenue by about $24 billion a year. Fiscal policy is likely to be expansionary going into 2012, with increased spending seen on education, health care, and in other social sector areas.

“An overall budget deficit equivalent to 2.1% of GDP is projected for 2011 and 2012,” said Mr. Rhee. “Given this strong fiscal position, there is scope to run a somewhat more stimulatory fiscal policy in 2012 if GDP growth prospects dim.”

For 2012, fixed asset investment is likely to remain the major growth driver with continued strong investment in housing. Private consumption should also pick up, as well as exports, provided world trade conditions improve.

The report notes that the PRC’s rapid expansion over three decades has led to economic imbalances that policy makers are seeking to address through the 12th Five-Year Plan. Continuing reforms, including rebalancing the investment and export-led pattern of economic growth to put more emphasis on domestic consumption, will be crucial for sustainable, long-term growth.


Source: Asian Development Bank

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